EU Due to Urge Yuan's Revaluation

China's official currency is the renminbi, which literally means "people's currency". It is also known as the yuan. There is little doubt among Western and Chinese economists alike that it is undervalued. And this has been a source of conflict for years.

This is why the EU is now sending its three top finance representatives to Beijing. Jean-Claude Trichet, the president of the European Central Bank, Joaquin Almunia, the Commissioner for Economic and Monetary Policy, and Jean-Claude Juncker, the head of the Eurozone group of finance ministers should arrive in the Chinese capital on Tuesday.

Liu Liqun, a Europe expert at the Chinese Academy for Social Sciences, thinks the West's fears are not unfounded but that the Chinese government has introduced several measures to redress the problem.

"For example, this year one-year benchmark interest rates have been raised five times already and the reserve requirement ratio has been increased to 13.5 percent. This all contributes indirectly to an appreciation of the currency. But the appreciation is happening in small steps," he admitted.

Yuan-dollar-euro

In July, China abandoned its decade-old fixed exchange rate to the US dollar in favour of a link to a basked of world currencies.

The yuan's value has since climbed by 10 percent but only against the US dollar -- especially as the dollar is under pressure because of the real estate crisis and bleak economic prospects.

But against the euro, the yuan's value has actually fallen. And the EU's trade deficit with China is still growing. It will probably reach a record height of 170 billion this year.

Bottom of production line

Gudrun Wacker, a China expert at the German Institute for International and Security Affairs, explained that the Chinese government did not feel that concerned by this figure.

"The Chinese say that they're quite far down in the production chain, in terms of added value. In China, products are basically assembled but there's not much profit to be made. The argument is that many T-shirts have to be sold before they can buy an Airbus."

Whoever is pocketing the most profit, the trade deficit means that China has the world's biggest currency reserves at its disposal. That means almost 1.5 billion dollars.

Chinese dilemma

China now faces a dilemma -- if it tries to shift its currency investments into other currencies such as the euro, the dollar's slide will only be accelerated.

But if it invests further in the dollar, China's currency reserves will lose value.

A reform of the exchange rate system or a massive appreciation of the yuan might save the day. But analysts don't think either scenario is likely. In other words, it doesn't seem as if the top EU envoys are going to achieve much during their China trip.