Part B Central Bank Governor on RMB Exchange Rate
The Governor of People's Bank of China Zhou Xiaochuan made responses on hot issues such as the exchange rate of the Chinese currency Renminbi and China's trade balance during an interview with Xinhua correspondent recently. Following are the questions and Zhou's answers:
Xinhua correspondent:Hello, governor, it’s our great pleasure to have you here for this interview. As we all know, two hot issues in China’s international trade are RMB exchange rate and China’s huge foreign currency reserves. These two questions are raised by Mr. Horst Kohler, managing director of the International Monetary Fund (IMF) and Mr. John Snow, treasury secretary of the United States during their recent visits to China. First of all what do you think of the fixed exchange rate of the RMB? Mr. Zhou: It is my pleasure to be here and explain some of the policies we hold about exchange rate. China has moved away from the fixed exchange rate and carried unified, managed floating exchange rate since 1994 based on market supply and demand of foreign exchange. Between 1994 and 1997, the exchange rate of the RMB against the US dollar appreciated steadily from 8.71. This has reflected the feature of a managed float rate.
However, by the end of 1997, at the request of neighboring economies and international institutions, Chi
na substantially narrowed the floating band of the RMB exchange rate. This has helped reduce the shock of the Asian financial crisis and dispel the fear of RMB devaluation. This narrowing of the band should be looked at as a responsible reaction but not as a change from float to fixed regime. China soon resumed its original band and improved the formation mechanism of the RMB exchange rate. At that time we recognized that the Asian financial crises had been over and their related problems had been solved. It will be China’s policy to follow the market and economic situation when it comes to exchange rate.
Xinhua correspondent: Thank you for your clear explanation about the exchange rate policy, which some western countries unfairly condemned as manipulation by the government. Now let’s move on to the second issue. Will China continue to maintain large trade surplus and high foreign reserves growth?
Mr. Zhou: As a central bank, we are clear that the Chinese government does not pursue trade surplus, but rather aims at a rough overall balance in the current account. It is also a policy followed by the Ministry of Commerce, and the intention of the present government as well.
The government has never pursued rapid growth of foreign exchange reserves. As a matter of fact, in t
he 1990s China used to record a low level of foreign reserves; so it was necessary to expand them to be compatible with the level of import and external debts. However, it was the outbreak of the Asian financial crisis in 1997 that has led us
to reconsider the appropriate level of foreign reserves among Asian countries and a higher level was thought to be desired. Since then China's foreign exchange reserves have recovered to an adequate level and are no longer expected to grow at a high rate. With continuous expansion of import and export and capital inflows to China, we would be comfortable to have a moderate growth.
Xinhua correspondent: But the fact remains that China’s present exchange reserves are very high. Will China be able to achieve a rough overall trade balance as a policy objective?
Mr. Zhou:Ah, ha, that’s a tough question. When we discuss issues we have to put them into historical context. One reason that accounts for the rapid increase of foreign exchange reserve is the preparation for the resumption of China’s WTO status. At that time, many people predicted that China's import would surge and exceed potential growth of export as a result of substantial reduction of tariff and non- tariff measures, including import quota and further opening up of service sector. By the end of 2001 when China was formally accepted as a member of WTO, we entailed a series of trade reforms t
o comply with the WTO rules. Naturally during this period unlike many other countries, China overhauled its trade policy. It turned out that while China's import in 2002 recorded a rapid expansion, export also surged, resulting in a trade surplus of 30.4 billion US dollars. Nevertheless, it is difficult to predict whether China will record trade surplus or deficit in the following years.
In the five years following the accession to WTO, China continued to cut tariff and relax quantitative import restrictions. We also further liberalize our service trade, including financial and communication sectors. All these have increased the difficulty to forecast current account balance. Since the beginning of world financial crisis, the growth of China's imports has accelerated. We sent several procurement delegates to Europe and USA. We continue to buy the Treasury bills—the US government bonds to help reduce the effect of this financial crisis. In the first half of this year, China's trade surplus has reduced. Estimates generally show that the growth of imports will be approximately nine percentage points higher than that of exports this year. Eventually with a trend of imports outgrowing exports, China's trade will balance in a year or two. Based on this trend, it is too early to judge whether the RMB exchange rate is undervalued or overvalued. Therefore it would be unwise to make exchange rate adjustments on such a ground.
reaction rate
Xinhua correspondent: Given China’s export composition is it possible to address Sino-US trade imbal
ance by means of exchange rate?
Mr. Zhou: It is well-known that a country's exchange rate is related with its balance of payments. However, it depends on the country's overall trade balance rather than on bilateral trade balance. Bilateral trade balance may be affected by structural, political and other factors. International trade theories and WTO spirit call for multilateral-trade balance rather than bilateral trade balance.
Given the two countries' existing economic and trade structure, the United States would continue to have big trade deficit with China, even if China achieved an overall current account balance through changes in trade and currency policies. The US trade deficit may be attributable to structural imbalances and fiscal deficits in the United States rather than the RMB exchange rate.

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