The People's Bank of China (PBC), the country's
central bank, yesterday released a report on the implementation of
monetary policy in the fourth quarter of 2005, including
stabilizing renminbi (RMB) valuation and improving interest rate
mechanisms.
The following are the key extracts of that report.
Current situation conducive to economic
growth
The current domestic situation is conducive to the stable and
healthy development of China's economy.
Urban and rural incomes are growing rapidly, which will
stimulate consumption.
The confidence index of urban residents about their future
income grew 1.2 percent in the fourth quarter of 2005.
Although the problem of excess supply exists in many fields,
fixed assets investment in China is still likely to rebound, so
uncertainties still lie in investment, the report said,
recommending the adjustment of the investment structure.
The world's economy will continue to grow, benefiting Chinese
exports, which still face risks in relation to oil price hikes and
increasing trade protectionism.
The PBC said that some fundamental problems in economic
operations have not been solved, and suggested that the country not
rely too much on investment and export growth. It should also avoid
traditional production methods that give rise to serious pollution
and enormous energy consumption while generating only low
profit.
By the end of 2006, China will fully open its financial markets
according to its World Trade Organization (WTO) commitments, which
will introduce further challenges to domestic financial
companies.?
RMB to remain stable in 2006
The value of the RMB will stand at a reasonable and balanced
level.
It pledged to upgrade the managed, floating exchange rate system
to cater to the needs of China's economic development and financial
stability, in an "independent, controllable and progressive"
way.
US manufacturers argue that the RMB is kept "artificially lower"
to make Chinese goods cheaper for US consumers, and US products
more expensive in China, and the US government says China accounted
for a quarter of its trade deficit last year.
Pressure on China for another RMB revaluation is reportedly
increasing.
But the PBC says: "The exchange rate plays only a role in
adjusting international payments. Other factors come into play as
well."
Policies on foreign trade, resource pricing and foreign exchange
management should combine to promote the balance of international
payments.
The RMB has gained nearly?3 percent against the US dollar
since its July 21 revaluation, trading at a central parity rate of
8.0485 to the dollar on Tuesday.
Early this year, China began a new policy of calculating the
RMB's value against the US dollar using a weighted average of the
prices given by major commercial banks. The highest and lowest
offers are excluded from the calculation.
Giving banks a role in setting the new daily benchmark, or the
central parity rate, is seen as a sign that the PBC is willing to
allow market forces a greater role in daily trading, analysts
acknowledge.
Market forces will play a "fundamental" role in the
determination of the RMB's value.
A central bank survey last November of 1,113 enterprises with
foreign trade rights showed that Chinese enterprises responded
positively to the new exchange rate mechanism.
Nearly three-quarters of these enterprises said their exports
either rose or were stable in November.
Earlier figures showed that trade surplus prompted China's
foreign exchange reserves to surge to US$818.9 billion by the end
of last year, second only to Japan.
The PBC has stressed that a floating RMB is not simply one that
will appreciate, and the prevailing view among industry watchers is
that the RMB will strengthen gradually this year.
Uncertainty over future price trend
The probable investment rebound will lead to rising prices of
raw materials, fuel and power, which will be further exacerbated by
the ongoing reform of China's resource-pricing systems concerning
fuel, water, power, natural gas and coal.
The prices of durable consumer goods as well as steel, iron,
aluminum and cement products, however, will probably fall due to
oversupply, dragging down the producer price index (PPI) and
consumer price index (CPI).
Some 41.7 percent of urban residents have predicted price hikes,
up 5.5 percentage points from the previous quarter, and 4.3 percent
of urban residents predicted price drops, down 1.7 percentage
points from the previous quarter.
China to improve interest rate formation
mechanism
China will improve the interest rate mechanism by developing a
market benchmark system.
Two of the major monetary policies for 2006 are to gradually
promote market-oriented interest rate reform and improve their
formation mechanism.
It will also simplify the terms and varieties of benchmark
interest rates for loans, continue market-oriented reform of
interest rates for long-term and lump sum deposits, and offer
derivatives of interest rates after careful research.
There are also plans to upgrade the interest rate pricing
capability of commercial banks and rural credit cooperatives.
(Xinhua News Agency February 22, 2006)