The fourth quarterly meeting of the central People's Bank of China's
(PBOC) monetary policy committee has decided to steadily improve
the mechanism through which the renminbi (the Chinese currency)
exchange rate is determined, the bank said in a statement issued
last Monday.
Earlier, vice governor of the central bank Li Ruogu made similar
comments in Shanghai. Although the statement doesn't give detailed
improvement measures, some economists who were interviewed with
Beijing-based China Business Post agree that China should
give up the US dollar pegged exchange rate regime at an appropriate
time, and turn to peg the renminbi to a basket of currencies.
The renminbi revaluation question has been raised over the past
several years. Some US manufacturers blamed Chinese products: that
with the help of an "undervalued" renminbi, snapped their market.
Meanwhile, continuous trade spats clouded bilateral trade relation,
and possibly turned to trade wars. The US Finance Secretary John
Snow and Commerce Secretary Donald Evans visited Beijing in
September and October, to pressure China to appreciate the renminbi
or give up the US dollars pegging system.
According to talks between Chinese Premier Wen Jiabao and US
president George W. Bush in early December, an expert team from the
US government will arrive in Beijing next month to jointly discuss
the reform of China's exchange rate regime. It's said that
the US Finance Department promised to help solve capital
outflow problems in the process of gradual renminbi
liberalization.
China set up a managed floating forex system in 1994. It pegged
the renminbi to the US dollar around 8.3, and allowed the rate to
float in certain scope. The Chinese government firmly maintained
its exchange rate after the breakout of the Asian Financial Crisis
in 1997, which made southeastern Asian nations devalue their
currencies one-by-one.
The present forex regime greatly boosts foreign trade and
investment, but many economists also list its disadvantages: the
fluctuation of the US dollar will influence trade and investment,
as well as speculation on 'hot' money; it won't reflect the actual
exchange rate; it will though weaken the efficiency of monetary
policy.
Financial risks are always the top concern of Chinese
government, considering its fragile financial system. A guideline
of the third plenary session of the 16th CPC Central Committee
brought forward two tasks while addressing the problem: to keep the
basic stability of the renminbi exchange rate, and steadily loosen
control on capital accounts with the help of risk resistance
ability.
Now, it seems that there are plans for great movement against
the US dollar. China Business Post quoted the sources with the
central bank as saying that China plans to select 10 benchmark
currencies, and form a "basket of currencies" that reflect trade
flow.
Statistics show that China's four main trade partners in 2002 were
the United States, Japan, Hong Kong, and European Union. In
addition, six other countries or regions like Indonesia, Malaysia,
Singapore, Thailand, Republic of Korea and China's Taiwan were
complementary in trade. The trade volume with the 10 partners
accounted for over 89 percent of the total.
But nominal and actual exchange rates will depreciate 4.9
percent and 6.4 percent respectively, and economists made the
calculation supposing the renminbi is pegged to the above 10
"basket currencies". This conclusion is absolutely different from
the foreign viewpoint that the renminbi was undervalued 20 to 40
percent.
However, the 10 currencies have not yet been confirmed,
economists point out, saying that it will be decided upon finally
by the central bank.
(China.org.cn by Tang Fuchun, December 31, 2003)