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
The RMB value has risen by more than 6 percent since July 21, 2005, when the
Chinese government launched the reform of the exchange rate system to allow the
yuan to float against the US 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 before the reform.
"We will improve the mechanism for setting the RMB exchange rate, strengthen
and improve foreign exchange administration," Wen said.
RMB exchange rate might appreciate by 5 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 the
US dollar, 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.
Lin Yifu, a noted economist and political advisor, said China should combat
speculation over RMB appreciation by controlling the pace of the currency's rise
in value, according to a China Daily report on Monday.
If the currency is allowed to appreciate, the exchange rate's annual change
should be less than 3 percent, Lin said.
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 central bank.
China is seeking more channels to ease the pressure generated by rising
foreign exchange reserves, allowing businesses to keep a larger share of their
foreign exchange 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 exchange and loosened rigid controls on outgoing reserves, said
Huang Zemin, head of the International Finance Institute of East China Normal
The State Administration of Foreign Exchange granted 15 banks overseas
investment quotas totaling US$13.4 billion in 2006. Meanwhile, 15 insurance
companies were granted the quota totaling US$5.17 billion and one fund
management company was given a quota of 500 million US dollars.
The United States has blamed its colossal trade deficit on what it claims is
a seriously undervalued RMB and has been pressing China to allow for a bigger
However, an appreciating RMB will not change the trade pattern between China
and other countries, said Xie Fuzhan, head of the National Bureau of Statistics.
Xie said the RMB has appreciated gradually against the US dollar since China
launched the foreign exchange rate reform, but China's trade surplus with the
United States has not decreased.
Moreover, China still has a trade deficit with neighboring countries
including Japan, the Republic of Korea and the ASEAN ( Association of Southeast
Asian Nations) countries.
China will continue to uphold the principles of "independent initiative,
controllability and gradual process" in pursuing RMB exchange rate reform, said
The principles, set out at the beginning of the reform, indicate that China
will independently determine the content and timing of reforms in line with its
needs, take account of possible impact on the country's economy and push forward
the reform in a step-by-step manner, Xie said.