Top banker: China on track to renminbi reform
(China Daily)
Updated: 2005-02-07 02:00

LONDON: China is very much on the track towards an exchange rate reform in response to the demand of the world's richest nations for a more flexible exchange regime, China's central bank chief said on Saturday.

Zhou Xiaochuan

Zhou Xiaochuan, governor of the People's Bank of China, however, cautioned that the reform will be carried out in a measured way to guarantee stability of the renminbi, China's currency.

China sticks to its long-term goal of convertibility of the renminbi under capital account, he said in an exclusive interview.

To that end, China would reform the formulation mechanism of the renminbi's exchange rate and gradually relax control over cross-border capital movement. But the Chinese currency must be kept stable at a rational and balanced level, and potential financial risks must be fended off, he said.

Currently the renminbi is pegged to the US dollar at a stable rate of about 8.27 per dollar.

Zhou said China, for a little more than a year, has made substantive progress in preparing for a foreign exchange reform.

It has made efforts to prepare its commercial banks for a more flexible exchange rate in the future, relaxed foreign exchange controls, and improved its domestic foreign exchange market to familiarize its financial institutions and businesses with the environment of an open foreign exchange market, said Zhou.

As for whether China has a timetable for its exchange rate reform, Zhou said its pace will be in accordance with the need of China's overall economic reform.

The adjustment of the renminbi's exchange rate depends on a stable macro-economic environment, a healthy market scheme and a sound financial system, Zhou said.

China has yet to draw up a suitable reform plan to keep the renminbi stable at a rational and balanced level and has to take into account the impact of such a reform on regional and global economy, he said.

Zhou denied the renminbi is significantly undervalued. China's international trade balance has only a modest surplus, he said.

In 2004, China had an estimated trade surplus of US$20 billion, representing less than 2 per cent of its foreign trade total.

On China's foreign exchange reserves, he said there are several factors behind their relatively rapid increase: China had a moderate current account surplus; the good performance of China's economy attracted both foreign direct investment and reinvestment of foreign-funded companies in China; and the trend of capital outflow from China was reversed.

"These were nothing but normal," he said.

On concerns that the possible appreciation of the Chinese currency might result in a mass inflow of hot money into China, he said the problem should not be exaggerated because China is exercising strict controls on capital accounts.

He said China will work to ease restrictions on cross-border capital movement in a selective, step-by-step manner, creating conditions for renminbi's convertibility under capital account.

He held talks with US Federal Reserve Chairman Alan Greenspan and Treasury Under-secretary John Taylor as well as other G7 finance officials.

In talks with Greenspan and Taylor, Zhou reaffirmed China's policy on reforming its exchange rate mechanism and briefed them on progress made in this endeavour.

The two US officials said they understood the Chinese stand and its cautiousness in the reform, said Zhou.

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