If you go to Supermarket or any shopping centre today, you will find a lot of goods that are made in China. Like it or not, China is now the manufacturing firm of the whole world. So, what will happen if yuan were to appreciate?
Although Yuan is pegged to a basket of currency, it is relatively running a fixed exchange rate policy with USD forming the majority of the currency basket. Unless, your currency is pegged to Yuan, the likely effect is that yuan will rise against your currency -- the resulting effect will be increased import prices of Chinese goods. In an open economy, we may source the goods from other countries if the cost of getting certain goods from a certain country becomes less competitive. But, given the fact that it takes months or years to shift production facilities and also the fact that there are relatively very few countries that can match China in terms of production capacity and cost competitiveness, the likely effect that we will see from yuan appreciation is inflation.
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