China Issues Q&A on Further Reforming the RMB Exchange Rate Regime, Etc.

Q: In furthering the RMB exchange rate regime reform this time, what are the key aspects?

A: Following upon the reform in 2005, the reform this time does not involve a one-off exchange rate revaluation. The key remains the same in that market supply and demand will continue to play the fundamental role for exchange rate determination with reference to a basket of currencies. The RMB exchange rate floating bands will also remain the same as previously announced in the inter-bank foreign exchange market. The objective is to stabilize the RMB exchange rate basically around an adaptive and equilibrium level, and in the meantime, improve China´s BOP situation, and achieve economic and financial stability.

Q: Is it a good timing to further reform the RMB exchange rate now?

A: Several arguments support that there is a good opportunity to further reform the RMB exchange rate regime now. First, China´s economic recovery has become more solidly based, supported by enhanced economic stability. Second, it has become urgent for China to accelerate economic restructuring and improve its growth pattern, in view of the global financial crisis. The reform of the RMB exchange rate regime will facilitate economic restructuring by improving the growth quality and development efficiency. Third, a two-way floating RMB with greater flexibility will also help make the macroeconomic management more proactive and effective, in response to various external shocks.

Q: Why is a basket of currencies, rather than just the U.S. dollar, taken as the reference for the RMB exchange rate movement?

A: As its economy becomes more opened, China´s major trading partners now include a long and diversified list. During the period of January-May this year, trading volume with top 5 trading partners (EU, the U.S., ASEAN, Japan and China´s Hong Kong SAR) accounted for 16.3 percent, 12.9 percent, 10.1 percent, 9.4 percent and 7.5 percent respectively in China´s total trade. Meanwhile, capital and financial account transactions have also diversified across various regions in the world. RMB´s floating with reference to any single currency can neither meet the diversified demand currencies in trade and investment with different partners, nor reflect its effective level. A basket of currencies can meet such demand and reflect the effective RMB level more accurately. Therefore, it is necessary for the managed floating exchange rate regime to be based on market supply and demand with reference to a basket of currencies, and thus make the RMB exchange rate more adaptive to market behaviors. As China´s trading and investment partners become more and more diversified, it would be more appropriate for enterprises and households in China to switch their attention from just RMB-to-dollar exchange rate to the RMB´s value in terms of a basket of currencies.

Q: Will the RMB exchange rate fluctuate by a large margin?

A: A large fluctuation of the RMB exchange rate would bring considerable shocks to the domestic economic and financial stability, which is not in China´s fundamental interest. Maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level is an important element of furthering the RMB exchange rate reform. The basis for large fluctuation of the RMB exchange rate does not exist. China´s external trade is now gradually becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010, together with the more balanced BOP. The PBC will continue to work for the RMB exchange rate floating within the previously announced band in the inter-bank foreign exchange market. Efforts would be needed to improve macroeconomic management and foreign exchange administration to maintain macroeconomic and financial stability. This will facilitates China´s economic restructuring and transforming of its development model in a more proactive and effective manner. These in turn would also help create a sound policy environment for the RMB exchange rate stability.

Q: What impact would further the exchange rate regime reform have on the corporate sector?

A: In today´s international monetary system where the exchange rate of major sovereign currencies is floating, the corporate sector has to deal with movements in the exchange rates between home and foreign currencies. Market economy implies that market conditions faced by firms would be constantly changing. Many parameters, including price of raw materials, wage, market demand, product mix, tax rate, and etc, may also change, sometimes even more significantly than the exchange rate itself. Since China began to reform and open up, its economy has become more and more market oriented, and many firms have developed the ability to be more flexible and adjustable in face of changes in market parameters. The banking sector will also continue to improve financial services, help enterprises to manage the exchange rate risks, and provide greater support for growth of these firms. (partial answer)

Q: Do you think further reforming the exchange rate regime will have an impact on the use of foreign exchange by enterprises and households?

A: One primary task in the foreign exchange administration system reform in China is to facilitate the use of foreign exchange and holding of foreign exchange assets by domestic enterprises and households at lower cost of currency exchanges. Further reform of the RMB exchange rate regime is not expected to increase the cost of currency exchange services offered by banks. In fact, compared with most other countries and regions, the cost of currency exchange for enterprises and households in China is relatively low. (partial answer)