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After analyzing the relationships between the exchange rate and foreign trade, employment, industrial structure and capital flows, I would like to summarize my views.
We first need to assess properly the role of exchange rates in the economy.
Although exchange rates play a key role in adjusting a market economy, there are so many variables that influence the economy that we cannot put excessive emphasis on the importance of any of these, especially the impact of exchange rate on trade payments and employment.
Exchange rate distortions will damage the economic structure, while excessive exchange rate fluctuations may trigger financial turmoil. The relationship between the exchange rate and monetary policy is currently at its closest.
Second, perfecting the market-oriented exchange rate forming mechanism is a target of our reforms.
This is not only of significance to promoting China's industrial structural adjustment and harmonizing the situation between different regions and sectors, but is also of practical importance to achieving macro management targets.
China has been implementing and will continue to implement a market-driven managed floating exchange rate system, which fits well with the rules of the market economy.
Recent discussion about China's market economy status was connected with the renminbi exchange rate system. I do not think it was appropriate.
China has never manipulated its currency. And there is no direct link between the exchange rate system and market economy status.
The European Union once adopted fixed interest rate arrangements before the euro was introduced, while Hong Kong is still using an exchange rate system that is pegged to the US dollar. But this did not cause any questions to be raised about their market economy status.
Furthermore, the system in force in Western countries during the period of the gold standard and the Bretton Woods system was not a planned economy.
Third, perfecting the exchange rate forming mechanism is a comprehensive reform, and there are never simple adjustments to the exchange rate levels.
Perfecting the exchange rate mechanism should not be confined to broadening the floating range. It should also include things like steadily propelling the convertibility of the renminbi and improving trading patterns in the forex market.
What needs to be pointed out here is that perfecting the renminbi exchange rate does not mean an inevitable appreciation in the Chinese currency. Even if the floating range is broadened, the movement of the renminbi exchange rate will be both ways, both firming and weakening.
Fourth, maintaining the fundamental stability of the renminbi exchange rate is in the interests of both China and the rest of the world.
China is a developing country, its currency is not an international clearing currency, its financial markets are not fully developed and the financial system is relatively fragile. If major fluctuations occurred in its exchange rate, this may cause a financial or even economic crisis.
If a big country like China is hit by a currency crisis, major impacts on the world's financial and economic stability would be unavoidable.
Fifth, international co-ordination needs to be enhanced.
In order to prevent financial risks and possible impact that may result from interest rate fluctuations and protect regional and international currency and financial stability, the international community needs to strengthen co-operation in currency and financial arrangements.
The international community, especially developed countries, should not just emphasize the benefits of financial liberalization but ignore the huge risks it may bring.
(China Daily October 20, 2004)
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