China's foreign exchange reserves have grown rapidly since the beginning of this year.

The central bank has to buy hard currency on the foreign exchange market to keep the yuan,or renminbi,stable,raising money supply and fueling fears of inflation.

If the People's Bank of China takes measures to ease the inflationary pressure,it will increase the pressure for renminbi appreciation.

Foreign countries including Japan and the United States have repeatedly demanded that China appreciate the renminbi.

But if the government appreciates the renminbi,the country's exports will be harmed.

China's monetary policy and foreign exchange policy are caught in a dilemma.

China has had a controlled floating exchange rate since 1994.

From January 1of 1994to June 30of this year,the value of renminbi compared with the US dollar appreciated about 5per cent.

But the appreciation occurred mostly between January 1994and May 1995.

At that time,the band of movement for the exchange rate began to narrow.

The band further narrowed to less than 0.05per cent in 1998,when the government wanted to avoid financial risks after the Asian financial crisis broke out.

The controlled floating exchange rate system looks more like a fixed exchange rate system.

When countries suffering economic recession hope to shift domestic problems on to other countries,they usually target countries with a fixed exchange rate system or similar system,and demand that they appreciate their currencies.

China's controlled exchange rate system has become such a target.