The fourth quarterly meeting of the central 's (PBOC) monetary policy committee has decided to steadily improve the mechanism through which the renminbi (the Chinese currency) exchange rate is determined, the bank said in a statement issued last Monday.
Earlier, vice governor of the central bank Li Ruogu made similar comments in Shanghai. Although the statement doesn't give detailed improvement measures, some economists who were interviewed with Beijing-based China Business Post agree that China should give up the US dollar pegged exchange rate regime at an appropriate time, and turn to peg the renminbi to a basket of currencies.
The renminbi revaluation question has been raised over the past several years. Some US manufacturers blamed Chinese products: that with the help of an "undervalued" renminbi, snapped their market. Meanwhile, continuous trade spats clouded bilateral trade relation, and possibly turned to trade wars. The US Finance Secretary John Snow and Commerce Secretary Donald Evans visited Beijing in September and October, to pressure China to appreciate the renminbi or give up the US dollars pegging system.
According to talks between Chinese Premier Wen Jiabao and US president George W. Bush in early December, an expert team from the US government will arrive in Beijing next month to jointly discuss the reform of China's exchange rate regime. It's said that the US Finance Department promised to help solve capital outflow problems in the process of gradual renminbi liberalization.
China set up a managed floating forex system in 1994. It pegged the renminbi to the US dollar around 8.3, and allowed the rate to float in certain scope. The Chinese government firmly maintained its exchange rate after the breakout of the Asian Financial Crisis in 1997, which made southeastern Asian nations devalue their currencies one-by-one.
The present forex regime greatly boosts foreign trade and investment, but many economists also list its disadvantages: the fluctuation of the US dollar will influence trade and investment, as well as speculation on 'hot' money; it won't reflect the actual exchange rate; it will though weaken the efficiency of monetary policy.
Financial risks are always the top concern of Chinese government, considering its fragile financial system. A guideline of the third plenary session of the 16th CPC Central Committee brought forward two tasks while addressing the problem: to keep the basic stability of the renminbi exchange rate, and steadily loosen control on capital accounts with the help of risk resistance ability.
Now, it seems that there are plans for great movement against the US dollar. China Business Post quoted the sources with the central bank as saying that China plans to select 10 benchmark currencies, and form a "basket of currencies" that reflect trade flow.
Statistics show that China's four main trade partners in 2002 were the United States, Japan, Hong Kong, and European Union. In addition, six other countries or regions like Indonesia, Malaysia, Singapore, Thailand, Republic of Korea and China's Taiwan were complementary in trade. The trade volume with the 10 partners accounted for over 89 percent of the total.
But nominal and actual exchange rates will depreciate 4.9 percent and 6.4 percent respectively, and economists made the calculation supposing the renminbi is pegged to the above 10 "basket currencies". This conclusion is absolutely different from the foreign viewpoint that the renminbi was undervalued 20 to 40 percent.
However, the 10 currencies have not yet been confirmed, economists point out, saying that it will be decided upon finally by the central bank.
(China.org.cn by Tang Fuchun, December 31, 2003)
