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Opinion / Op-Ed Contributors

Road map for financial reform

By Zhou Xiaochuan (China Daily) Updated: 2013-12-18 08:17

Editor's note: The author, the governor of the People's Bank of China, outlined the government's proposed financial reform plans in his recent article in People's Daily. The following is the second part of an excerpted translation. The first part was carried by China Daily on Dec 11.

Making steady efforts to push forward marketized reforms of the country's exchange rate and interest rate mechanisms

To give the market a decisive role in the distribution of resources calls for the establishment of a market-dominated pricing mechanism and its improvement, so that the market can enjoy a free hand in deciding prices while undue interventions from the government can be reduced. As an important part of the factor market, interest and exchange rates are a determinant in the distribution of domestic resources, steadily pushing forward market-based interest and exchange rate reform will help China optimize and raise the efficiency of its distribution of funds, further strengthen the market's decisive role in the distribution of resources and accelerate the transformation of the country's economic development model and structural adjustments.

1. To make improvements to the marketized RMB exchange rate formation mechanism.

Continuous efforts will be made to improve the marketized RMB exchange rate formation mechanism, give market supply and demand a fundamental role in the process, raise the distribution efficiency of domestic and foreign resources, and promote a balance in international payments. Measures will be taken to develop the country's foreign exchange market, enrich its foreign exchange products and extend the market's breadth and depth to better meet the demands of corporations and individuals.

According to the country's foreign exchange market conditions and its economic and financial conditions, measures will also be taken to increase the two-way fluctuation elasticity of RMB exchange rates to ensure that its exchange rates can basically maintain a stable level. At the same time measures will be taken to further give the market-based exchange rate a bigger role and promote the basic departure of the country's central bank from regular exchange rate interventions, to the setting up of a managed floating exchange rate system based on market supply and demand.

2. To speed up efforts for interest rate marketization.

While adhering to the interest rate formation mechanism based on market supply and demand and making improvements to the market-based interest rate system and interest rate transmission mechanism on the basis that the central bank's macro-regulation capabilities can be enhanced, efforts for interest rate marketization will be speeded up. In a move to boost the self-pricing capability of domestic financial institutions, measures will be taken in the short term to improve the self-disciplining mechanism for interest rates pricing in the near future. Measures will also be taken to push forward inter-bank deposit certificate issuance and trading, in a bid to gradually expand the market-based pricing range for debt products issued by domestic financial institutions. In the short or mid term, measures will be adopted to cultivate a relatively developed market interest rate system and make improvements to the framework of the central bank's regulation over interest rate and its interest rate transmission mechanism. As a mid-term goal, efforts will also be made to realize a full interest rate marketization and put in place a sound market-based interest rate macro-control mechanism.

3. To perfect the bonds yield curve that can reflect market supply and demand.

The yield curve of government bonds, as the main fixed-income market return ratio, is a reflection of risk-free benchmark yields distributed within all kinds of time limits. Currently, some improvements are yet to be made to China's government bonds yield curve in terms of its accuracy, authority and completeness. As China's macro financial regulations change from quantity-dominated to prices-dominated and with the continuous advancement of its marketized interest rate reforms, the country needs to improve its government bonds yield curve and give the curve a bigger role in the distribution of its financial resources. In view of this, measures will be taken to improve the mechanism of government bonds issuance and optimize its maturity structure. At the same time, measures will be taken to further enrich the investor type, steadily raise the opening-up of the country's government bonds to home and abroad and increase the demand for transactions.

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