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China may continue managed floating exchange rate regime for next eight years: central bank advisor

(Xinhua)

13:55, August 05, 2011

China may continue to institute a managed floating exchange rate regime that is tied to a basket of foreign currencies for the next eight or nine years, the China Securities Journal said Thursday.

The RMB is unlikely to be floated freely in the near term as the country's economy faces internal difficulties during its reform drive and external uncertainties of the global economy, the report quoted Xia Bin, a member of the monetary policy committee of the People's Bank of China (PBOC), or the central bank, as saying.

"To create a relatively stable exchange rate formation environment, the government has to gradually open its capital market, so the RMB can not go global too soon," Xia said in his latest article.

But the regime will be more market-oriented in terms of floating range and frequency, and adopt relevant adjustments of currency weights in the basket, Xia said.

China moved to shift from a conventional dollar peg system to a managed floating exchange rate system in 2005, which means the central bank now does not link the yuan only to the U.S. dollar.

China's RMB "go global" drive requires totally free exchange of the yuan, which means the regulation of capital accounts should be fully opened, and that exchange rates will be largely determined by the demand and supply in both domestic and global markets. But the country can not handle this at its current stage of economic development, Xia said.

Xia suggested that the government should well coordinate policies concerning the exchange rate, capital management and reform while matching the reform of its exchange rate policy with that of capital management during the RMB's regionalization process.

According to Xia, establishing offshore RMB markets will not only help partially open the country's financial market, but also reduce the impact of international financial crises.

Xia also noted that the government should control the scale and structure of offshore RMB markets in line with the development of its exchange rate and capital management polices.

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