CHINA'S currency has long been undervalued, and this undervaluation has long been a sore spot for China's trading partners. American officials, in particular, have been upset by the impact of a cheap yuan on America's trade balance with China, and by the impact of that imbalance on employment. China allowed its currency to appreciate nearly 20% against the dollar from 2005 to 2008, but it halted the rise in 2008 out of concern for the impact of the global downturn on its export-oriented economy. Last year, as it was clear that China's economy was once more running at full steam (and then some) appreciation resumed. Not fast enough for its critics, it should be noted, but as you can see below, the rise in the yuan has been fairly steady and has so far amounted to an appreciation of about 4.6%.

Real exchange rate appreciation has two parts, of course—nominal appreciation, which we see above, and the relative change in inflation. Menzie Chinn discusses the latter point in a post here, and provides a chart of price growth in China:

Consumer price inflation has risen to an annual rate of over 5%. Given that American consumer price inflation is well below that, real exchange rate appreciation has occurred far faster over the past year than has nominal exchange rate appreciation.

Mr Chinn provides some nice analysis of this trend. He also quotes the new IDEAGlobal Asian Regional Markets:

During the last couple of days, some senior Chinese officials made interesting comments on CNY exchange rate policies. PBoC deputy governor Yi Gang said at the IMF ministerial meeting in Washington that CNY appreciation against USD and other currencies in PBoC's basket will help China to fight inflation, and that CNY is close to being freely usable, which would meet one main requirement of being included in the SDR. Meanwhile, PBoC Governor Zhou Xiaochuan said that China will continue to reform monetary and financing systems to allow more flexibility in the CNY exchange rate. However, he also said that it is difficult to measure effect of exchange rates in containing inflation from a technical perspective. Yi Gang has been an active proponent of exchange rate policy as a measure to fight inflation, although he suddenly changed his rhetoric and said something like ‘CNY is very close to equilibrium now' in March. The comments suggest that the idea of exchange rate policy as a tool against inflation might be regaining momentum in China. Yi Gang's comment on CNY's usability and Zhou's comment on more flexibility in CNY confirms the underlying trend of opening up CNY and suggests that the Chinese policy makers feel the need to speed up the process...

Emphasis mine. This suggests that appreciation will continue, and perhaps accelerate, as China responds to its overheating economy. And that is potentially a very good thing for both China and America.