China's central bank chief told Xinhua News Agency on Saturday
that the country is very much on track for exchange rate reform in
response to the demand of the world's richest nations for a more
flexible regime.
In an exclusive interview, he said that China will stick to its
long-term goal of convertibility under capital account.
To that end, the formulation mechanism of the exchange rate will
be reformed and control over cross-border capital movement
gradually relaxed. But he emphasized that the renmibi must be kept
stable at a reasonable level, and potential risks fended off.
Currently the renminbi is pegged to the US dollar at a rate of
about 8.27 per dollar.
Zhou said substantive progress has been made for a little over a
year in preparing for exchange rate reform.
Efforts have been made to prepare commercial banks for a more
flexible rate, foreign exchange controls relaxed, and the domestic
foreign exchange market improved to familiarize financial
institutions and businesses with an open foreign exchange market
environment, said Zhou.
As for whether there is a timetable for reform, Zhou said its
pace will be set in accordance with broader economic reforms.
The adjustment of the exchange rate mechanism depends on a
stable macroeconomic environment, a healthy market scheme and a
sound financial system, Zhou said.
He said that China has yet to draw up a suitable reform plan to
keep the renminbi stable and has to take into account the impact of
such a reform on the regional and global economy.
Zhou denied that the renminbi is significantly undervalued,
arguing that the international trade balance has only a modest
surplus.
In 2004, China had an estimated trade surplus of 20 billion
dollars, representing less than 2 percent of its foreign trade
total or its GDP, he said.
On foreign exchange reserves, Zhou said there are several factors
behind their relatively rapid increase: a moderate current account
surplus; the good performance of the economy attracting both
foreign direct investment and reinvestment of foreign-funded
companies; and a reversal in capital outflow trends.
"These were nothing but normal," he said.
In response to concerns that the possible appreciation of the
renmibi might result in a mass inflow of 'hot' money, he said the
problem should not be exaggerated because strict controls on
capital accounts are being exercised.
Zhou arrived in London to attend the Group of Seven (G7) finance
ministers' meeting.
He held talks with US Federal Reserve Chairman Alan Greenspan
and US Treasury Under-secretary John Taylor as well as other G7
finance officials.
With Greenspan and Taylor, Zhou reaffirmed China's policy on
reforming its exchange rate mechanism and briefed them on progress
made in this endeavor.
The two American officials said they understood the Chinese
stand and its cautiousness in reform, said Zhou.
