The People's Bank of China (PBC), the country's central bank, yesterday released a report on the implementation of monetary policy in the fourth quarter of 2005, indicating that renminbi (RMB) will stand at a reasonable and balanced level this year.

Current situation conducive to economic growth

The current domestic situation is conducive to the stable and healthy development of China's economy, the central bank said on Tuesday.

The income of urban and rural people is growing rapidly, which will stimulate consumption, said the report.

The confidence index of urban residents about their future income grew 1.2 percent in the fourth quarter of 2005, according to a survey by the central bank.

Although the problem of excess supply exists in many fields, the fixed assets investment in China is still likely to rebound, so uncertainties still lie in investment, the report said, recommending the adjustment of investment structure.

The world's economy will continue to grow stably, benefiting Chinese exports, which will still face risks including oil price hikes and increasing trade protectionism, it said.

Some in-depth problems in economic operation have not been fundamentally solved, it said, suggesting the country should not rely too much upon investment and export growth. It should also avoid traditional economic methods which trigger serious pollution and enormous energy consumption but only generate low profit.

By the end of 2006, China will fully open its financial markets according to its promise to the WTO, which will bring challenges to domestic financial companies, it said.

RMB to remain stable in 2006

The value of the Chinese currency renminbi (RMB) will stand at a reasonable and balanced level, the central bank reiterated.

It pledged to upgrade the managed, floating exchange rate system to cater to the need of China's economic development and financial stability, in an "independent, controllable and progressive" way.

American manufacturers argue that RMB is kept "artificially lower" to make Chinese goods cheaper for American consumers and US products more expensive in China, and the US government says China accounted for a quarter of the country's trade deficit last year.

Pressure on China for another RMB revaluation is reportedly increasing.

But the PBC report said, "The exchange rate plays a certain role in adjusting international payments, but it is not enough for the exchange rate alone to take that responsibility."

Policies on foreign trade, resource pricing and foreign exchange management should combine to promote the balance of international payments, it added.

The Chinese currency has gained nearly 3 percent against the US dollar since its July 21 revaluation, trading at a central parity rate of 8.0485 versus the dollar on Tuesday.

Early this year, China began a new policy of calculating RMB's value against the U.S. dollar using a weighted average of the prices given by major commercial banks. The highest and lowest offers are excluded from the calculation.

Giving banks a role in setting the new daily benchmark, or the central parity rate, is seen as a sign that the PBC is willing to allow market forces a greater role in daily trading, analysts acknowledge.

The market force will play a "fundamental" role in the determination of RMB's value, the central bank reiterated in its Tuesday report.

A central bank survey last November on 1,113 enterprises with foreign trade rights showed that Chinese enterprises responded positively to the new exchange rate mechanism.

Nearly three-quarters of these enterprises say their exports either rose or kept stable in November.

Earlier figures showed that trade surplus prompted China's foreign exchange reserves to surge to US$818.9 billion by the end of last year, second only to Japan.

The PBC has stressed that a floating RMB is not simply one that will appreciate, but the prevailing view among industry watchers is that the RMB will strengthen gradually this year.

China to improve interest rate formation mechanism

The central bank said that China will improve the interest rate formation mechanism by developing a market benchmark system in order to increase the bank's ability to influence market interest rates.

Two of the major monetary policies for 2006 are to gradually promote market-oriented interest rate reform and improve the formation mechanism of interest rates, the bank's report said.

It will also simplify the terms and varieties of benchmark interest rates for loans, continue market-oriented reform of interest rates for long-term and lump sum deposits, and offer derivatives of interest rates after careful research.

The central bank said it plans to upgrade the interest rate pricing capability of commercial banks and rural credit cooperatives.

The bank said the value of the RMB will remain at a reasonable and balanced level.

It pledged to upgrade the floating exchange rate system to cater to the need of China's economic development and financial stability, in an "independent, controllable and progressive" way.

Uncertainty exists over future price trend

The probable investment rebound will lead to rising prices of raw materials, fuel and power, which will be further exacerbated by the ongoing reform of China's resource-pricing systems concerning fuel, water, power, natural gas and coal, said the bank in a report on monetary policy.

The prices of durable consumer goods as well as steel, iron, aluminium and cement products, however, will probably fall due to oversupply, dragging down the producer price index (PPI) and consumer price index (CPI) in the country, the report said.

According to a survey by the central bank in the fourth quarter of 2005, 41.7 percent of the urban residents predicted price rises, up 5.5 percentage points from the previous quarter, and 4.3 percent of the urban residents predicted price drops, down 1.7 percentage points from the previous quarter.

(Xinhua News Agency February 22, 2006)