International anxiety over China's currency exchange rate policy appears to be gathering momentum again, given that the yuan has risen only slightly since June 19 when the People's Bank of China (PBOC) made it more flexible.

Though the recent global economic uncertainty warrants some caution, it is vital that the yuan rises more steadily over time in order to address economic imbalances and international reactions both. China's exchange rate policy should, however, focus more on a basket of currencies, de-emphasizing the bilateral exchange rate against the US dollar.

To start with, expectations of a sharp rise in the yuan by international investors and foreign policymakers were unrealistic. Although the central government is determined to make the exchange rate more flexible, it has never given the impression of a drastic revaluation of the yuan.

In fact, the policy statements of PBOC, the country's central bank, during the past few years have repeatedly emphasized the need "to improve the exchange rate formation mechanism" and "keep the exchange rate at the rational and balanced level basically stable".

The government's conservative stance on the yuan's revaluation is best understood by its concern over GDP growth and job creation. Traditionally, China's policymakers have been reluctant to implement any policy with negative short-term growth implications. But this is changing gradually. There is increasing agreement among the policymakers that overemphasis on short-term growth may result in serious structural problems such as large current account surplus which, in turn, could damage long-term growth potential.

Like any other country, however, China's exchange rate policy is also subject to domestic politics. A large number of exporters and foreign direct investment entities strongly oppose the revaluation of the yuan, often citing potential job losses as the main fallout. For instance, one government department conducted a stress test a few months ago, which showed that a 3 percent rise in the value of the yuan was the maximum change that the export sector could possibly cope with. The "test" was certainly flawed, because the yuan rose more than 5 percent a year between 2005 and 2008 when the export sector and the job market both were at their strongest.

But recent developments in the world economy have probably made the policymakers more cautious. The deteriorating sovereign debt crisis in the European Union increased the risk of a "double dip" recession in the world economy. China's economic growth slowed down too, though modestly, in the second quarter and the trend is likely to continue next year.

More importantly, the current account surplus has shrunk sharply - from the peak of 10.8 percent of GDP in 2007 to 3.5 percent during the first quarter of this year. This has certainly weakened foreign politicians' argument that the revaluation of the yuan is key to adjusting external imbalances.

Most Chinese policymakers agree that the yuan should rise in the long run, because of structural imbalances and rapid productivity growth. PBOC officials, too, have complained about losing the monetary policy independence because of a very rigid exchange rate policy.

An undervalued currency has already resulted in huge amounts of foreign exchange reserves. It has also contributed to excessive liquidity in the markets, evident in rapid growth of asset bubbles and sharp increases in prices of certain products, such as garlic and cotton.