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The drive towards a fully convertible local currency will gather pace now China has entered the World Trade Organization (WTO) - even though membership does not require it.
But the immediate challenge for financial authorities is to ensure the country has the right balance of international payments.
And this task will become more complex as China gradually opens up its industries according to its WTO accession terms, said a spokesman for the State Administration of Foreign Exchange (SAFE).
He said China's trade surplus will diminish as imports grow rapidly caused by lower tariffs and demand for overseas materials and equipment generated by China's economic growth.
But the country's WTO membership will definitely trigger a bigger influx of overseas investment and compensate for less favourable conditions in trade surplus, the spokesman said.
"We are optimistic about the prospects of China's balance of international payments after China joins the WTO and the renminbi's exchange rate will continue to be stable," he said.
China's position for external payments is rock solid at the moment. Despite the turmoil in international financial markets since 1997, China's foreign exchange reserves have swelled steadily to more than US$180 billion at the end of June and the exchange rate of the renminbi has stayed firmly around 8.3 yuan to one US dollar.
But the official said SAFE will allow greater flexibility of renminbi's exchange rate while maintaining the stability of renminbi to make it more responsive to demand and supply in the foreign exchange market. This is very likely to become more volatile due to increasing changes in the trade sector.
The central People's Bank of China, which strongly intervened in the foreign exchange market in 1997 and 1998 to safeguard the value of the renminbi, has been quietly permitting the currency to fluctuate in a wider range since last year - a move believed to serve as an experiment for the post-WTO era.
The spokesman said financial authorities will take steps to prepare for the final freeing up of its currency by developing more efficient and smooth administration of international capital flows, and building monitoring and alarm systems for capital flows to circumvent financial risk.
Foreign exchange administration is mainly about the regulation of international currency flows for trade and investment.
China made its currency convertible under the "current account," which covers trade, in late 1996.
But under the "capital account," which is about credit business and investing directly and through securities, the renminbi remains unconvertible.
The majority of WTO members are similar to China in this regard - having liberalized the current account while still controlling the capital account.
The SAFE spokesman said control over the capital account was crucial in helping China fend off the impacts of the Asian financial crisis in 1997 and 1998 that rocked most East Asian economies with convertible currencies.
But the convertibility of the currency will eventually become necessary in a mature market economy, provided that financial authorities are able enough to supervise and regulate money flows in an increasingly sophisticated international financial market.
"It (a fully convertible currency) is our long-term goal," said the spokesman. "We will advance this process in an active, prudent manner."
But China's financial authorities remained tight-lipped about a possible timetable for the opening of the capital account.
(China Daily November 15, 2001)
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