China to push forward exchange rate reform step by step

Chinese Premier Wen Jiabao told the ongoing 2007 Annual Meetings of the Board of Governors of the African Development Bank Group in Shanghai that China is deepening reforms of its foreign exchange management system.

The nation is improving the Renminbi exchange rate mechanism, giving greater scope to the role of the market and introducing greater interest rate flexibility, according to Wen.

The premier's remarks are testimony to China's continuing commitment to progressive reform of the Renminbi exchange rate, said Tan Yaling, an expert in international finance in Shanghai.

Wen's words on "giving great scope to the role of the market" showed that China intends to follow the global trend in its ongoing exchange rate reform, according to Ding Chun, deputy head of the European issues research institute in Shanghai-based Fudan University.

Ding said this implied a move from a controlled to a market-oriented economy and the gradual abandonment of administrative instruments in exchange rate fixing.

"One of the major problems challenging China's development is the long-term trade surplus, which has led to swollen foreign exchange reserves and excess liquidity at home," said Li Yang, head of the finance research institute of the Chinese Academy of Social Sciences.

Reforming the Renminbi foreign exchange rate mechanism will aid China's fast-growing economy, Li said.

China began reforming the exchange rate mechanism in July 2005.

On January 4, 2006, China's interbank market ushered in a market maker system and OTC (over-the-counter) system for foreign exchange swaps to improve the market fluidity and flexibility of the foreign exchange rate.

Over the past two years, the Renminbi has floated within a narrow range. Since the beginning of this year, as the U.S. dollar has declined in value, the currency has appreciated by 5.54 percent against the American currency.

However, the Renminbi's performance has not appreciated against other major currencies such as the euro.

The Renminbi's performance against the dollar is seen as reflecting the weakness of the American currency rather than the strength of the Renminbi and so China has maintained a prudent attitude toward widening the float range.

Under pressure to revalue the Renminbi, China has allowed citizens to buy more foreign currencies and commercial banks to trade shares overseas through qualified domestic institutional investors (QDII).

"China took a highly responsible attitude during the Asian financial crisis 10 years ago. That is no reason for it to act imprudently now in setting the Renminbi foreign exchange rate," said Tan Yaling.

Tan said that developed nations should accept more risk and responsibility in setting foreign exchange rates to help developing nations.

Source: Xinhua

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