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Q: China is one of the few countries controlling its foreign exchange. Since reform and opening up, China has begun to reform its foreign exchange administrative system. How is reform happening? The long-term goal of this reform is to make RMB convertible; under what circumstances can this goal be realized?

A: Under a planned economy, China had complete control of its foreign exchange. All of the foreign exchange resources were concentrated for allocation and use. At the beginning of 1994, to speed up the development of an export-oriented economy, China began to reform its foreign exchange administrative system, introducing a series of measures including a banking system for foreign exchange settlement and sale, unification of exchange rates and establishment of an inter-bank foreign exchange market.

All of this helped China to successfully realize convertibility of RMB under current account and establish a single and managed floating exchange rate system based on market demand and supply, setting up a basic framework of foreign exchange resources being allocated by the market.

After 1997, to resist the impact of the Asian financial crisis, China adopted a policy of non-devaluation of the RMB and kept the RMB exchange rate stable. Now, many people think that China is still strictly controlling its capital account. This is a misunderstanding. In fact, RMB has partly been convertible under capital account. Among the 43 transaction items under capital account divided by the International Monetary Fund, eight items are completely liberalized, 11 items are under loose restriction, 18 items are under certain restrictions, and convertibility is strictly prohibited for only six items.

China is further relaxing control on capital account items with ripe conditions, based on meeting the purchasing demands of foreign exchange for current account transactions. The relaxation mainly includes supporting the overseas direct investment of Chinese enterprises, conditionally approving some foreign-funded multinational corporations to transfer temporarily idle capital abroad, supporting Chinese-funded multinational corporations to make up for assets and operational capital of their overseas companies, allowing legal emigrants and non-citizens to remit their legal assets in China abroad according to regulations, selectively introducing RMB bonds issued by international financial institutions in China, looking at introducing the system of qualified domestic institutional investors, and permitting qualified non-banking financial institutions to invest in foreign securities.

In the near future, China will aim to promote the balancing of international payments, further deepening the reform of the foreign exchange administrative system, continuing to propel the convertibility of RMB, exploring the market mechanism and administrative system for adjusting international payments, increasing the varieties of exchange in the inter-bank foreign exchange market, trying the market-maker system of U.S. dollars, improving the present exchange rate administration and monitoring system, promoting reform of the RMB exchange rate formation mechanism, and keeping the RMB stable at a rational and balanced level.

As early as 1993, China announced that the long-term goal of reform of the foreign exchange administrative system was to realize the convertibility of RMB.

On the issue of RMB exchange rate reform, China will adhere to the principles of initiative, controllability and gradualness. Initiative means to decide the form, content and time of RMB exchange rate reform, according to the requirements of China's own reform and development. RMB exchange rate reform will fully consider its influence on the stability of the macro-economy, economic growth and employment, conditions of the financial system and financial administrative and supervision, bearing capabilities of enterprises and foreign trade, as well as influence on the economy and finance of neighboring countries, regions and the world.

Controllability means that changes in the RMB exchange rate can be controlled through macro-management. The reform should be propelled, but not be uncontrolled. Fluctuations in the financial market and economy should be avoided. Gradualness means to push the reform step by step, taking both present demand and long-term development into consideration.

All in all, China will continue to improve the formation mechanism of the RMB exchange rate, and further complete an exchange rate system gearing to the market with more flexibility. But the reform is broad and has far-reaching influences. A lot of preparation should be done, and favorable conditions and environment are to be created so that all aspects can bear out the possible influences. China's responsible attitude and action is beneficial not only to the stability and development of China's macro-economy, but also to the stability and development of the economy of neighboring countries and the world.