Its not going to be an overnight process but a convertible Yuan will be there in a few years.
That's what the IMF said 12 years ago. I have followed the Chinese economy on and off for the last 35 years. Everybody was always too optimistic in their predictions on China. Humans have a great admiration for large countries and always overestimate them, while underestimating small countries. Express some economic numbers in per capita numbers and suddenly, things look different. Some examples. Foreign trade (exports plus imports) of Russia compares to that of Denmark, except that Russia's foreign trade is dominated by oil and thereby very sensitive to world oil prices. The Dutch population is roughly comparable to that of Australia. The richest country in the world is Luxembourg. Big is not necessarily beautiful.
Central banks don't invest in physical gold with a primary intent of investment. It is there as a guarantee.
Gold can only be a guarantee (of what, really? Try getting gold for your Indian banknotes) if it is in demand. Gold is of little industrial use and used mostly in jewelry. Its price is largely maintained by the superstition that it will be in demand when the world economy collapses. Of course, if gold is not a good investment, it works just like USD in your national reserves: those reserves go down, with nothing in return.
The government seldom intervenes directly except as an extreme measure.
Every time the RBI changes its interest rate policy (changing the core interest rate) it has a direct influence on the exchange rate. For an extreme example, look at Iceland in the early months of the crisis. The country was bleeding foreign currency at an unsustainable rate. The central bank increased the central interest rate to (if memory serves) well over 20% to support the krone.
In 2009, while exports dropped, we still grew by 6% backed by our domestic consumption when most economies stagnated. While labour-intensive and other service based industries are a strong pillar, they are not the only pillar to this economy. BOP for 2010 in India is expected to be surplus.
This is why I am so optimistic on India's development. Domestic consumption is picking up, giving domestic industry a much better base to develop and India's service sector is developing. The cause for the latter is the wage difference. As competition for well-trained staff increases, this advantage will slowly disappear, but it will get more money into domestic consumption. As domestic prices increase, production for export will gradually be replaced by production for domestic consumption, paid for by higher salaries. This is a healthy development process. Letting prices rise by appreciation of the currency by contrast means that you are losing your external competitive edge (plus you lose on the reserves of the central bank created with the BOP surplus) without the increase in the salaries and the development of domestic consumption.
Peter
