Exchange rate could float in a wider band

By Zhu Qiwen and Xin Zhiming (China Daily)
Updated: 2007-05-26 06:44

The Chinese currency will respond to market change in a more flexible way, but a forced considerable revaluation cannot help at all, Chinese Vice-Premier Wu Yi said on Thursday in Washington.

"I believe the floating band of the RMB exchange rate will be constantly expanded with market change," Wu said at a welcome banquet hosted by six American organizations.

"China's exchange rate reform will be advanced in an orderly way under the principle of self-initiative, controllability and gradual progress," she said.

Wu said the elasticity of the RMB exchange rate will be continuously increased through the reform, with a roughly stable RMB exchange rate maintained at a reasonable equilibrium.

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"In the meantime, we must take measures to effectively control and duly dispose of risks within the financial system," she said.

The exchange rate of the Chinese currency was a hot topic during the second round of the China-US Strategic Economic Dialogue held early this week in Washington.

Some people in the United States have blamed the Chinese currency for their country's ballooning trade deficit with China, claiming that the RMB has given Chinese exporters an unfavorable competitive edge.

But Wu said it is recognized by many internationally renowned economists that the RMB exchange rate is not the main cause of the huge US trade deficit.

"Any attempt to impose pressure on the RMB for its considerable revaluation cannot help at all and could probably injure the interests of the two countries and the public," she said.

Since China introduced a RMB exchange rate reform in July 2005, the RMB has now appreciated by 8.1 percent in cumulative terms.

The People's Bank of China, the country's central bank, on May 21, widened the RMB trading band from 0.3 percent daily movement against the US dollar to 0.5 percent.

"A more flexible foreign exchange regime is clearly in line with China's strategical goals," said Zhao Xijun, finance professor with Renmin University of China.

According to Zhao, the Chinese government has long made clear its intention to achieve full convertibility of the RMB and open its capital account.

China has taken a step toward allowing greater market-driven flexibility in its exchange rate regime since the foreign exchange reform in 2005, Zhao said.

In view of the expansion of the floating band for the RMB, Zhao said he believed the pressure of revaluation might increase because of China's huge trade surplus and potential inflow of more foreign funds.

The widening of the RMB trading band has already triggered market expectations for more aggressive appreciation of the Chinese currency.

"But we believe this is the wrong conclusion to draw. We are holding fast to our view that it will be only 4 percent or so against the US dollar in 2007," said Stephen Green, an economist with Standard Charted Bank.

(China Daily 05/26/2007 page1)

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