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China vows to improve setting of RMB exchange rate

(Xinhua)
Updated: 2007-03-05 13:35

BEIJING -- Chinese Premier Wen Jiabao said Monday the nation will improve the mechanism for setting the RMB exchange rate and seek ways to use the massive state foreign exchange reserves appropriately.

Wen made the statement while delivering a government work report at the opening of the Fifth Session of the Tenth National People's Congress, the top legislature.

The RMB value has risen by more than six percent since July 21, 2005, when the Chinese government launched the reform of exchange rate system to allow the yuan to float against the U dollar within a daily band of 0.3 percent around the official central parity rate.

The central parity of RMB against the US dollar was 7.7403 yuan per US dollar on March 5, compared with the rate of 8.28 yuan per US dollar before the reform.

"We will improve the mechanism for setting the RMB exchange rate, strengthen and improve foreign exchange administration, and actively explore and develop channels and means for appropriately using state foreign exchange reserves," Wen said.

RMB exchange rate might appreciate by five percent in 2007, according to a Xinhua Economic Analysis Report, a regular product by a team of more than 80 economic analysts working with Xinhua Economic Information Department, released at the beginning of this year.

The report held that the short-term RMB exchange rate will be influenced by the fluctuation between the dollar and other currencies, but in the long run, it depends on the progress of China's exchange rate reforms. Stable appreciation in small steps is generally expected.

The foreign exchange policy is in line with the pace of China's economic development and the daily floating band is enough to allow sufficient appreciation of the RMB, said well-known Chinese economist Fan Gang.

The major problem in the world capital market was the excessive amount of US dollars, which has led to its devaluation. RMB appreciation not only helps strike market speculation, but is also beneficial to maintaining a stable economy, according to Fan.

The Chinese premier also said China will "actively explore and develop channels and means for appropriately using state foreign exchange reserves."

Foreign exchange reserves reached 1.066 trillion US dollars at the end of 2006, up from 212.2 billion dollars at the end of 2001, according to the People's Bank of China.

The country is seeking more channels to ease the pressure generated by rising foreign exchange reserves, allowing businesses to keep a larger share of their foreign income and encouraging financial investment abroad in the form of qualified domestic institutional investors (QDII).

Contrary to its past policies, China has implemented stricter regulations on incoming foreign exchanges and loosened rigid controls on outgoing reserves, said Huang Zemin, head of the International Finance Institute of East China Normal University.