China will let market forces play a fundamental role in forming
the exchange rate and gradually increase the flexibility of the
yuan, the central bank said yesterday.
The People's Bank of China (PBOC), however, "will keep the
reasonable and balanced level of exchange rate of the renminbi
basically stable," it said in a statement issued yesterday to mark
the one-year anniversary of last July's landmark foreign exchange
reforms.
China abandoned its decades-old dollar peg and shifted to a
managed float against a basket of currencies on July 21 last year,
when it also revalued the yuan by 2.1 percent.
The yuan has gained an accumulated 3.8 percent since then.
The daily benchmark, or the central parity rate for the US
dollar, was set at 7.9688 yesterday, according to the
Shanghai-based China Foreign Exchange Trade System.
"The reform (to date) has achieved its desired results," the
PBOC said in the statement, noting that it will press ahead with
its foreign exchange regime reform and develop its foreign exchange
market in an "active, controlled and gradual" approach.
The central bank said that it would let the forces of supply and
demand in the market play an increasingly fundamental role in
determining the exchange rate.
It also pledged yesterday to develop the country's fledging
foreign exchange market by introducing more risk-hedging
instruments and expanding the investment channel for both
businesses and households.
Financial institutions, the PBOC said, "are encouraged, with a
sound risk-control mechanism as the precondition, to actively
conduct financial innovation."
The central bank also vowed yesterday to improve its foreign
exchange management, further facilitating the freight and services
trade.
How to manage the country's mounting foreign exchange reserves,
already the world's largest, has long been a challenge for the
central bank.
The ballooning trade surplus, which surged to a record high of
US$14.61 billion last month, coupled with the inflow of foreign
investment, had propelled the country's foreign exchange reserves
to a record high of US$941.1 billion by the end of June.
The central bank is encouraging a policy shift from stockpiling
forex reserves in State coffers to letting businesses and residents
hold more foreign currency.
The PBOC has in recent months loosened foreign exchange
restrictions on companies. It said yesterday that it would further
relax the requirement for companies to sell foreign exchange to the
central bank, but the bank did not elaborate on what specific
measures it would take.
It also vowed to put in place a foreign exchange management
regime in which domestic companies would be encouraged to "go
abroad."
The PBOC said it would improve the monitoring and warning system
on short-term cross-border capital flows to "ensure national
financial security and stability."
(China Daily August 11, 2006)