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Home >> Business
UPDATED: 16:53, July 25, 2005
Central bank governor on RMB exchange rate reform
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China's central bank governor Zhou Xiaochuan elaborated on the guidelines, principles, key parts and impacts of the Renminbi exchange rate reform on July 23 in an interview with CCTV.

Zhou summarized up the general guidelines of the reform in two sentences: first, to exercise a managed floating exchange rate regime based on market supply and demand; second, to improve the exchange rate mechanism to keep the RMB exchange rate basically stable at a reasonable and balanced level.

Implementation of such a reform is a job quite "artistic", said Zhou, which includes plan choosing, impact analysis and timing. "In this regard, we must uphold the principles of independent initiative, controllability and gradual progress."

Zhou said that the latest move contains three key points: the yuan to US dollar pegging system is switched to a basket of foreign currencies, and at the same time the yuan floats according to market demand-supply relations; the exchange rate will be floating within a reasonable band; and an initial adjustment is made, that is, a 2 percent rise of RMB in value against the US dollars.

Talking about preparations for the whole reform, Zhou said that reform is a sensitive thing that needs a stable macro-economic situation at home and, as we learned from the Asian financial crisis, also sound domestic financial institutions and markets. So, China has always put at first the reform of large state-owned commercial banks to ensure substantial progress.

The goal of our reform, Zhou pointed out, is to put in place a managed floating exchange rate regime based on market supply and demand, that is, to give market a bigger role. To that end, China has gradually lifted restrictions on foreign exchange using, supplying, converting and carrying, so as to make the market reflect demand-supply relations more effectively.

Another condition is that the foreign exchange market must have risk management instruments available to enterprises and financial institutions, such as the Foreign Exchange Forward Contract (DF), so that enterprises would be able to protect their interests by using various instruments on the financial market when the exchange rate floats.

When these are get done with, financial conditions would be mature, Zhou said. When our central leadership sees all necessary conditions are finally here, then it is time to take the action.

The exchange rate reform this time means greater purchasing power of China and a stronger and more valuable RMB yuan, which have more positive influences on the economy than negative ones.

Generally, the reform favors more importers than exporters, said Zhou. But of course it depends on the competitiveness of each company and sector. To resist the pressure, enterprises have to sharpen their competitive edge by upgrading products and selling them at a higher price.

The exchange rate reform indicates China's wider opening to the world, which has created tremendous job opportunities for the country, and so will the reform in exchange rate.

By People's Daily Online

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