They also reflect tactical changes by policymakers: more transparency in policy targets and more mature use of financial tools to reach the targets.

Under these conditions, the price of capital is primarily fixed by the market. The market becomes more predictable with cool-headed calculations based on price. Excessive liquidity, a destabilizing factor in the Chinese economy, is not the result of monetary policy. It is produced by the current economic structure that depends heavily on foreign trade and foreign investment under strictly regulated exchange rates.

If this economic structure is not changed, the issue of excessive liquidity will never be solved no matter how much the central bank does to direct money to the capital market or somewhere else.

But changing the economic structure cannot be completed by the monetary authorities as long as the country is still in need of foreign investment and exports.

However, the planned establishment of the State Foreign Exchange Investment Company will help control the inflow of foreign currencies to some extent.

According to reports, the company will issue bonds in renminbi and make investments with a limited amount of the foreign exchange reserve. This will greatly help to control the excessive market liquidity and facilitate the transition toward a market economy.

Reform in the exchange rate regime is also necessary. But before this is done, numerous preparations need to be made, not only in financial businesses but also in the policymaking process and the capital market.

(China Daily 04/23/2007 page4)

1

2

(For more biz stories, please visit Industry Updates)