RMB exchange rate reform--decided out of China's own need (8)

The RMB exchange rate will be kept basically stable at a rational and balanced level

However, there are people who are bent on speculating on the future development trend of RMB exchange rate. Some individual foreign media even claim that the 2 percent revaluation of the RMB is only an initial adjustment and that the RMB exchange rate would be further elevated in the not distant future.

Regarding this, the news spokesperson for the central bank made a solemn statement on July 26, which says: The initially adjusted level of 2 percent revaluation of the RMB exchange rate means that an adjustment was made at the beginning of the reform to the RMB exchange rate formation mechanism, with the adjusted level set at 2 percent, it doesn't mean that the first-step adjustment of the RMB exchange rate was set at 2 percent, and that there will be further adjustment thereafter.

Actually, the general objective of the RMB exchange rate reform is to establish a sound managed floating exchange rate system based on market supply and demand, and maintain a basic stability of the RMB exchange rate on a rational, balanced level. A drastic fluctuation of the RMB exchange rate will bring great impact on China's economic and financial stability, and will thus not conform to China's fundamental interests. A better reform to the RMB exchange rate formation mechanism will make it absolutely impossible for the emergence of this situation.

The spokesperson analyzed when he said that firstly, after the exchange rate formation mechanism reform, the RMB will cease being pegged to any single currency, instead, adjustments will be made based on market supply and demand and in reference to a basket of exchange rates. The interchange of the exchange rates of principal currencies on the international market objectively reduces fluctuation of the RMB exchange rate.

Secondly, along with the enhancement of the basic roles of exchange rate and other economic levers in the allocation of resources, the further straightening out of the supply-demand relationship of foreign exchange and the gradual establishment and perfection of the balance of payment regulating mechanism, the balance of payments will tend to be basically in equilibrium, thus laying a solid economic base for the stability of the RMB exchange rate.

Thirdly, China will make active effort to properly coordinate macroeconomic policies and steadily push forward various reforms, so as to provide a favorable policy environment for the stability of the RMB exchange rate.

In addition, the central bank will strive to raise the level of regulation and control, improve foreign exchange control and maintain a basic stability of the RMB exchange rate on a rational, balanced level.

Experts hold that from a medium- and long-term perspective, the exchange rate reform will not necessarily bring about an all-the-way appreciation of the RMB. Approaching the matter in a dialectical way, we find that the development trend of the RMB exchange rate is subject to domestic and international influences, and these two facets involve both appreciation and depreciation factors. From a historical perspective, the German mark and the Japanese yen were not an all-the-way appreciation, instead, phase adjustments were made. Therefore, risk capital's unilateral, unrestrained speculation on the appreciation of the RMB is not a sensible move.

Carried on page 2 of People's Daily July 27, 2005, the article is translated by People's Daily Online

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