Beijing can argue that the economic fundamentals alone
suit a period of currency stability, never mind that the US Senate would be up
in arms after passing legislation designed to force the pace of appreciation,
or that the world at large wants China to ramp up consumption to boost global
growth. 
Yuan forwards markets are pricing in a slower pace of
appreciation for the currency against the dollar. Few analysts expect Beijing
to repeg the yuan to the dollar, but instead see a temporary slowdown in its
rise to ride out the global slowdown and make a statement to the United
States. 
Beijing's worry is that the external backdrop becomes as
bad as the summer 2008, when global financial turmoil put a then three-year
long, 21 percent appreciation of the yuan on hold. 
Latest figures show that Chinese economic growth is its
slowest in two years, the pace of exports is wilting and the flow of capital
into the country is slowing down. 
Export growth to the euro zone, China's biggest export
market, more than halved in September from August and exports were a net drag
on the economy's growth in the first three quarters of this year. 
Meanwhile, Beijing can make the case that the 7 percent
gain against the dollar chalked up since the last pause in the currency's
appreciation ended in June 2010 has kept consumption robust, as demonstrated by
September's 17.7 percent year-on-year jump in retail sales. 
Crucially, China would get to stand fast against its main
rival, the United States. If it bows too quickly to US demands to let the yuan
strengthen, millions of Chinese may take offence and so set off alarm bells in
stability-obsessed Beijing. 
A short-term halt to appreciation versus the dollar might
be a suitable political reminder that with every new yuan-trade settlement
bilateral-currency-swap deal signed with cooperative trading partners, China
makes the dollar incrementally less important in international trade and global
currency reserves. 
"For our own interests, we think that the yuan's
further rises should be curbed given the risk that the United States and Europe
could slip into a recession," said Wang Jun, an economist at CCIEE, a
government think-tank in Beijing. 
"Also, we don't want to be seen as yielding to
foreign pressure and we have room to resist such pressure," he said. 
Still, such heavy handed intervention to manage the yuan
would also be a reminder to China's trading partners of the risks of adopting
the currency in their trade settlement. 

Currency appreciation has helped the fight against
import-fueled domestic inflation, which has likely peaked and is set to ease as
global commodity prices cool. 
All of which makes it easier for the central bank to keep
a tight leash on the yuan, according to analysts familiar with Beijing's
policy-making process. 
China's Commerce Ministry urged the United States not to
"politicize" economic issues on Wednesday and said that legislation
aimed at pressing China to let the yuan rise faster violates international
trade rules.
Premier Wen Jiabao said on Saturday the yuan would remain
stable to protect exporters, state media reported. Wen said "a basically
stable exchange rate" would help stabilize exports and enhance business
confidence. 
There's some strong evidence that stabilization is
setting in, even if temporarily. 
The yuan ended seven straight months of appreciation
against the dollar last week after the US Senate passed a bill aiming to punish
China for having an undervalued yuan.  
In the six trading days since the US bill was passed, the
yuan has slipped 0.6 percent against the dollar from a record high of 6.3375
hit on Oct. 11, a sizeable lurch for a currency that usually rises or falls no
more than 1 percent in any month. 
"This should be seen as a reaction to the US
bill," said Li Wei, an economist at a think-tank under China's Commerce Ministry. 
Even though analysts do not expect the bill to become
law, investors are anticipating the pace of appreciation in the yuan to
ease.  
The premium that China's benchmark one-year onshore
forwards enjoy against spot yuan hit a six-month low on Friday as investors
pared expectations for gains. 
Against the dollar, the yuan slipped 1.2 percent in
September, its first decline since January. 
"This could be temporary, once the external risks
ease and China's growth stabilizes, the yuan will climb up again," said
Wei Yao, China economist at Societe Generale in Hong Kong. 
Indeed the yuan's inflation-adjusted value against a
basket of currencies rose 3.8 percent in September, according to the Bank for
International Settlements, suggesting that its steadying against the dollar is
not a shift in overall currency policy. 

Analysts point out that strong demand from Chinese firms
and tight supply of greenbacks globally caused by Europe's debt crunch may also
have exaggerated recent dollar/yuan moves. 
The latest Reuters poll, for instance, still forecasts a
yuan gain of some 4.8 percent against the dollar this year. And while CCIEE's
Wang expects the pace of appreciation to ease to 3-4 percent in 2012, that's
hardly a complete halt. 
Indeed, few analysts believe China will go as far as to
repeg the yuan to the dollar after unshackling and revaluing it in a landmark
move in July 2005, pointing to the near 30 percent gain since as evidence that
China wants currency appreciation. 

But while investors might be twitchy in the near term,
given the gloomy economic backdrop and rising political rhetoric, few are
willing to bet against one of the clearest trends in global financial markets
of the last six years that in real inflation adjusted terms has delivered a 40
percent rise in the yuan. 
"The problem is not as serious as in 2008. Exports
are slowing but not collapsing," said Gao Shanwen, chief economist at
China Essence Securities in Beijing, adding that any pause would be
"related to the US bill, but the overall trend of yuan appreciation
remains intact." 
Indeed, the yuan's path higher has been peppered with
pauses of varying length and intensity — often dictated by broad market
conditions — but the overall policy of gradual appreciation has been one that
investors have clearly heeded. 
"That seems to have been the policy approach used by
the authorities in the past," said Robert Subbaraman, Nomura's Asia chief
economist. 
Zhao Xijun, an economist at People's University, says a
slowdown in yuan rises fits with the broader monetary policy setting, which has
turned neutral as Chinese leaders fret about an abrupt economic slowdown going
forward while taking some comfort that inflation has peaked. 
"Slower yuan appreciation reflects China's economic
situation — growth is slowing and there are international concerns about
economic risks in China," he said.