The country will "continue to maintain the basic stability of the renminbi exchange rate" and will further improve the mechanism through which the rate is formed on the basis of the existing market-based, managed floating-rate system, the bank said in its second-quarter monetary-policy report released yesterday.

The central bank's rhetoric was unchanged from its usual stance and was the latest government response towards growing international pressure to revalue the currency, also known as the yuan.

The United States, Japan and South Korea have called on China to let the renminbi appreciate. They said the currency is undervalued and is increasingly making China's exports cheaper as the US dollar - to which the yuan is pegged - keeps weakening.

The Chinese Government has said it will improve the rate-forming mechanism and will allow the yuan to float in a broader range but it has given no timetable for doing so.

The central bank noted that, in the remainder of this year, the upward pressure on the renminbi is likely to rise further as the slow recovery of the world economy may trigger broader trade protectionism. A United Nations report on June 25 predicted the world economy would grow by 2.25 percent this year, slightly faster than the 2 percent recorded last year.

The Chinese bank's report said: "The slow growth in the world economy is likely to further reinforce the international propensity for trade protectionism, which will constrain increases in China's exports and heighten the pressure for the renminbi to appreciate."

The bank has already been scaling up purchases of mounting US dollar excesses in the market, largely as a result of strong export rises, to keep the yuan within its usual trading band of 8.2760 to 8.2800.

Such dollar purchases have translated into fast-growing supplies of renminbi and have pushed China's money supply to levels where the likelihood of serious inflation becomes a possibility, though a remote one.

The central bank also reiterated that it would maintain "a prudent monetary policy" to support economic growth, although the growth of the broad money supply M2, which covers cash in circulation and all deposits, had quickened to 20.8 percent in the first half of this year from 16.8 percent last year.

But it called attention to the rapid rises in loans this year and said it would further examine the causes behind them.

(China Daily August 6, 2003)