China's central bank chief told Xinhua News Agency on Saturday that the country is very much on track for exchange rate reform in response to the demand of the world's richest nations for a more flexible regime.

But Zhou Xiaochuan, governor of the People's Bank of China, cautioned that reform will be carried out in a measured way to guarantee stability of the renminbi, China's currency.

In an exclusive interview, he said that China will stick to its long-term goal of convertibility under capital account.

To that end, the formulation mechanism of the exchange rate will be reformed and control over cross-border capital movement gradually relaxed. But he emphasized that the renmibi must be kept stable at a reasonable level, and potential risks fended off.

Currently the renminbi is pegged to the US dollar at a rate of about 8.27 per dollar.

Zhou said substantive progress has been made for a little over a year in preparing for exchange rate reform.

Efforts have been made to prepare commercial banks for a more flexible rate, foreign exchange controls relaxed, and the domestic foreign exchange market improved to familiarize financial institutions and businesses with an open foreign exchange market environment, said Zhou.

As for whether there is a timetable for reform, Zhou said its pace will be set in accordance with broader economic reforms.

The adjustment of the exchange rate mechanism depends on a stable macroeconomic environment, a healthy market scheme and a sound financial system, Zhou said.

He said that China has yet to draw up a suitable reform plan to keep the renminbi stable and has to take into account the impact of such a reform on the regional and global economy.

Zhou denied that the renminbi is significantly undervalued, arguing that the international trade balance has only a modest surplus.

In 2004, China had an estimated trade surplus of 20 billion dollars, representing less than 2 percent of its foreign trade total or its GDP, he said.

On foreign exchange reserves, Zhou said there are several factors behind their relatively rapid increase: a moderate current account surplus; the good performance of the economy attracting both foreign direct investment and reinvestment of foreign-funded companies; and a reversal in capital outflow trends.

"These were nothing but normal," he said.

In response to concerns that the possible appreciation of the renmibi might result in a mass inflow of 'hot' money, he said the problem should not be exaggerated because strict controls on capital accounts are being exercised.

Zhou arrived in London to attend the Group of Seven (G7) finance ministers' meeting.

He held talks with US Federal Reserve Chairman Alan Greenspan and US Treasury Under-secretary John Taylor as well as other G7 finance officials.

With Greenspan and Taylor, Zhou reaffirmed China's policy on reforming its exchange rate mechanism and briefed them on progress made in this endeavor.

The two American officials said they understood the Chinese stand and its cautiousness in reform, said Zhou.

(Xinhua News Agency February 7, 2005)