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China is aiming to strike a basic balance in international payments this year, before the negative impact of persistent surpluses comes into full play, a senior government official said Thursday.
Possible policy options include supporting high-tech and high value-added exports and slashing less competitive exports, encouraging imports on a selective basis, and tightening supervision of capital inflow, particularly short-term capital that may be used in transactions involving the local currency, the Renminbi, the official said.
Guo Shuqing, director of the State Administration of Foreign Exchange (SAFE) and deputy governor of the , said the policy package also includes an improved Renminbi exchange rate-forming mechanism "under the precondition of the basic stability of the exchange rate being maintained."
Guo's remarks were part of a statement published Thursday on SAFE's website.
Experience from other countries indicated that, when dealing with international balance of payment surpluses, "one can either ignore the role of the exchange rate, or rely too much on the exchange rate," but coordinated actions from both domestic economy players and foreign exchange regulators are needed, he said.
Trade and capital account surpluses in recent years brought China's foreign exchange reserves to US$403.3 billion at the end of last year, the second-largest amount in the world following Japan.
Forex reserve hikes were even heftier in the past three years as businesses and individuals opted to hold Renminbi and trim their forex assets in pursuit of the higher interest rate on Renminbi deposits and betting on an appreciation of the local currency.
Some foreign countries have stepped up pressure on the Chinese Government to revalue the yuan, which they say is undervalued and has caused job losses in the United States.
The role of the Renminbi's exchange rate in China's surpluses has been "enormously exaggerated," the official said.
A lower exchange rate theoretically stimulates exports and restricts imports. But when the Renminbi's exchange rate averaged lower last year, China's exports and imports both accelerated, with import growth outstripping export growth by 5.3 percentage points to bring the trade surplus down by 15.9 percent.
"This is mainly because there are many factors that can affect exports and imports, and the effect of the exchange rate can be offset by other factors," Guo said.
Furthermore, changes in the exchange rate are not necessarily immediately factored in trade commodity prices, and they have even less influence on capital flows.
"Therefore, one cannot explain or predict the changes in international balance of payments simply by using the Renminbi's exchange rate," he said.
The official underlined the urgency of achieving more balanced international payments, but acknowledged the difficulty in doing so, citing China's high savings ratio and inadequate domestic demand, its ample supply of cheap labor that attracts foreign investments, as well as the need for developing countries to hold sufficient forex reserves to prepare for financial risks.
However, Guo cautioned against the possibility of overshooting the goal in the event that market expectations (on the Renminbi's exchange rate) reverse and speculators attack.
"There is the possibility of a turnaround in the international balance of payment situation," he said. "If controls are loosened improperly, and management fails to function when market conditions change direction, there can be a crisis."
(China Daily February 27, 2004)
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