Since the financial crisis in 1997, the Chinese government has promised not to devalue the RMB. From the start of this year, the RMB exchange rate has fallen below the traditional lower limit and the central bank did not intervene.

On April 12, everything seemed normal, but as the markets closed, the RMB was suddenly pulled down to 8.2830 against the dollar, a record low since 1997. Although 8.28 yuan is regarded as the lower limits, the central bank did not enter the market to intervene. On May 23 and 24, the RMB went beyond the traditional exchange rate band again and set new record lows. The central bank did not intervene. People have speculated that the non-intervention suggests that the government will let the RMB exchange rate float freely.

On June 26, the RMB closed at 8.2768, exceeding the old range of 8.2770 to 8.2800. The BBC filed a report arguing that the relaxation of the trading range is an important step towards a freely convertible RMB, inferring that China is making this move to prepare for entry into the WTO.

In an editorial, the Hong Kong-based China News Agency said that present time is a good opportunity for China to transition to a managed floating exchange rate system. On the one hand, the currencies of various countries have recover steadily after the Asian crisis, eliminating pressure to devalue the RMB. On the other hand, the domestic economy is turning around the drops in exports for the last four or five years. The expectation of entering WTO should provide momentum for the authorities to adjust the RMB exchange rate mechanism.

However, a July 12 article in the Economic Daily argued that high RMB exchange rates were only closing prices. The fluctuation range of the RMB is within the set range. The State Foreign Exchange Administration issued a notice on inter-bank foreign exchange trade which stipulates that inter-bank foreign market dollar price can be fluctuated within the range of 0.3% from the median price published by the People's Bank of China.

The BBC also pointed out that whether China allows the RMB to float freely depends mainly on China's economic development. In view of the report that IMF urged China to let the RMB freely float in the fourth quarter or the first quarter of next year, the BBC noted that although China is a member of IMF, the IMF has no rights to require China to make any reform as conditions for loans or assistance.

Recently, some experts and scholars have suggested that the exchange rate range should be more flexible. The Singaporean daily Lianhe Zaobao said on July 19 that Dai Xianglong thinks these proposals are worth of studying, but is not ready to change present system.

In the future, the central bank will continue to maintain a stable currency policy and strengthen supervision over the growth of money supply to facilitate the strategic adjustment of national economic structure. The economic growth rate of 8.2% in the first half-year and foreign reserve of 158.6 billion dollars as well as favorable international balance provide a solid foundation for a stabile RMB exchange rate.

(from People's Daily)