China abruptly on Thursday evening allowed the renminbi (RMB) to
appreciate by a modest 2 percent, but said its exchange rate will
not float by a big margin. The remark was apparently intended to
ward off any speculation on further jumps.
The yuan has been pegged to the US dollar since 1994 at around
8.28 yuan to US$1. It is now trading at 8.11 yuan to US$1.
The overall aim of exchange rate reform is to build a managed,
floating exchange rate mechanism based on market supply and demand
and to maintain the yuan's stability at a reasonable equilibrium,
the People's Bank of China (PBC) said.
Big ups and downs of the exchange rate are not in line with the
fundamental interests of China since such fluctuations could
threaten the country's economic and financial stability, the PBC
added.
"This (the yuan's big ups and downs) will definitely not
happen," the bank told the press.
The PBC listed the following reasons:
First, the RMB is no longer pegged to a single currency, but to
a basket of currencies. The mutual changes of major currencies in
the world market will keep fluctuations down.
Second, the international balance of payment will normalize
itself with economic tools including the exchange rate playing a
role in resource allocation, and streamlining foreign exchange
supply and demand. These are solid foundations for a stable
yuan.?
Third, China's macro-economic policies will aim to provide a
sound environment for the stability of its currency.
Finally, the PBC itself will endeavor to enhance its fine-tuning
ability, improve foreign exchange management and keep the yuan
trading at a reasonable equilibrium.
The PBC said that the exchange rate reform is designed to cater
to the need of alleviating foreign trade imbalances, stimulating
domestic demand, sharpening domestic enterprises' competitive edge
globally and speeding up the country's reform and opening-up.
China's foreign exchange reserves skyrocketed to US$711 billion
as of end June on the back of its trade surpluses. China still
exercises foreign exchange controls, which means that enterprises
cannot keep all of their foreign currency earnings and that a large
part of foreign exchange inflows become the country's reserves.
Some developed countries, typically the United States, say that
China, by artificially lowering the value of the yuan, gave its
exporters an "unfair" advantage over everyone else, hurting the job
markets in other countries.
But the PBC said the Chinese government always maintained an
"independent and highly responsible" attitude towards the exchange
rate issue.
China adheres to choosing an exchange rate system that caters to
its domestic situation by taking into consideration of its
fundamental interests and economic and social development, the PBC
added.
Meanwhile in Hong Kong, Stephen Ip, the special administrative
region's acting financial secretary, welcomed the latest reform,
but added that Hong Kong would keep its currency pegged to the US
dollar.
"The government has no intention at all of changing the Linked
Exchange Rate system, which has served Hong Kong well for more than
21 years and has been the anchor of our economic stability," Ip
said in a statement.
"Hong Kong's financial and monetary systems are well established
and well prepared for changes of this kind," Ip added.
According to Ip, the reform of the RMB regime is also likely to
benefit the economy of Hong Kong. These benefits include greater
competitiveness in Hong Kong's exports to the Chinese mainland and
the stability brought by more sustainable economic development of
the mainland.
A stronger RMB will also raise the purchasing power of mainland
consumers and this is likely to benefit Hong Kong's exports to the
mainland. Hong Kong's inbound tourism will also benefit as more
mainland visitors will spend more in Hong Kong, Ip added.
According to Joseph Yam, chief executive of the Hong Kong
Monetary Authority, the recent refinements introduced to the Linked
Exchange Rate system have strengthened the authority's ability to
deliver monetary stability in Hong Kong and to handle the impact of
capital flows arising from changes to the RMB exchange rate
regime.
"The financial market in Hong Kong is not volatile," Yam
added.
(Xinhua News Agency July 22, 2005)