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Chinese Central Bank's Question-And-Answer Statement on Yuan (Translation)

The following is a translation of portions of the question-and-answer-style statement on yuan exchange rate reform issued by the People’s Bank of China today.

Is further yuan reform in China’s interests?

The decision to proceed further with yuan reform and an improved managed-float exchange rate regime is based on China’s conditions and development strategy. It is in line with reform in the direction of a market-economy system, and with “scientific” development. It is in China’s long-term and core interest, as it can further integrate the country into the global market.

First, it will aid China’s efforts on structural adjustment and sustainable development. A floating exchange rate enables flexible adjustments of relative price levels at home and abroad. This will help direct investment toward domestic-demand sectors including services, promote industry upgrades, adjust the economic development model and reduce trade imbalances and the economy’s overreliance on exports.

Second, it will also help curb inflation and asset bubbles and strengthen the effectiveness of macroeconomic controls.

Third, it will help maintain strategic opportunities for China. China is a beneficiary of globalization, so proceeding with yuan reform will aid the government’s goals of pursuing mutual benefit, long-term cooperation and common development with other countries. It will also help maintain strategic opportunities and an international trade environment favorable to China.

How to minimize the negative impact of exchange-rate reform?

To further reform the renminbi exchange-rate regime, we need to minimize the possible negative impact.

First, we need to ensure yuan fluctuations are controllable and prevent the possibility of market forces causing excessive adjustment of the renminbi exchange rate. The balance of payments account is moving closer to equilibrium and increases in the costs of domestic labor, resources and land are adding to the price of our nation’s exports. The current yuan rate is not too far from equilibrium, so there is no basis for substantial fluctuation.

Second, we have to ensure orderly yuan-rate movements reflecting China’s economic fundamentals and macroeconomic policy needs. A floating exchange rate will help improve the balance of payments, but isn’t targeting bilateral trade imbalances with particular countries.

Third, adjustments to yuan policy need to reflect the principle of gradualism. There will be time for companies to restructure and digest the effects of a floating exchange rate and for industries to relocate and upgrade, keeping Chinese companies generally competitive in the global market and guiding employment toward the service sector.

Fourth, we will strengthen monitoring and management of short-term speculative capital, preventing large-scale hot-money flows from shocking China’s financial system.

Is this good time for further yuan reform?

It is a good time for further yuan reform.

First, the recovery and upturn of the Chinese economy has become more solid with enhanced economic stability, making this a good moment for yuan reform.

Second, China is accelerating efforts to adjust its economic structure and growth model, and the global financial crisis has made this task even more important and pressing. The reform of the exchange rate mechanism will help promote economic restructuring and improve the quality and efficiency of growth.

Third, strengthening yuan flexibility and allowing two-way movement of the currency are also needed to improve the pro- activeness and effectiveness of China’s macroeconomic policies dealing with different external shocks.

Why does the yuan rate have to refer to a basket of currencies rather than a single currency -- the dollar?

As China becomes more open to the rest of the world, its trading partners are becoming more diversified. The trading volume with the top five trading partners -- the EU, U.S., ASEAN, Japan and Hong Kong -- account for 16.3%, 12.9%, 10.1%, 9.4% and 7.5% of China’s total imports and exports respectively for the first five months this year.

A yuan peg to a single currency can’t meet the need to diversify currencies used for trade and investment, and also can’t reflect the real exchange-rate level. A currency basket can reflect the real exchange-rate level more accurately. Therefore we must adjust the exchange rate based on market supply and demand, and move the yuan with reference to a basket of currencies.

For companies and households in such a diversified trading and investment environment, it isn’t proper to value the yuan just based on the U.S. dollar. More attention should be paid to multilateral exchange rates, rather the bilateral rates, and to the yuan exchange rate change against the currency basket.

Will any substantial fluctuation occur to yuan?

Large fluctuation in the value of the yuan isn’t in China’s interest, because it will have a relatively big effect on the nation’s economic and financial stability. Keeping the yuan basically stable at a reasonable level is an important part of further reforming the currency’s exchange rate.

There is no basis at present for large changes in the yuan’s exchange rate. China’s external trade is steadily becoming more balanced. The ratio of current-account surplus to GDP has been declining continuously since 2009, and the balance- of-payment account is moving closer to equilibrium.

The People’s Bank of China will keep the exchange rate floating bands the same as previously announced in the interbank foreign-exchange market and manage and adjust exchange rates dynamically.

China will steadily push forward other reforms to create a sound policy environment for the stability of the renminbi exchange rate.

What are the effects on companies and employment of yuan movement?

Under the modern international currency system, most major currencies have adopted floating exchange-rate regimes, so exporters can’t avoid exchange rate fluctuations.

Since the start of China’s economic reform and opening-up policies, the market economy has developed to a relatively high level, and many companies have had the capability and flexibility to adapt and cope with market changes.

Based on the actual situation between 2005 and 2008 before the global financial crisis worsened, China’s exports grew 23.4 percent annually. Industries sensitive to exchange rates, such as textiles and light industry, maintained growth and hadn’t seen significant losses or business closures. Generally speaking, exchange rate movements have provided motivation and pressure for industries to upgrade and for the market to open wider.

The global economy is gradually recovering and the upturn in the Chinese economy has become more solid, creating a favorable environment for smooth yuan reform and minimizing the negative effects. In future, the government will create further favorable conditions to help companies restructure and the banking industry will improve financial services to provide powerful support to businesses and help companies manage exchange-rate risks.

Further exchange-rate reform will also help create more jobs, especially jobs in the service sector. Exchange rate movement will prompt exporters to move from simple processing to more detailed and refined processing, and by so extending the production chain, create more jobs.

The exchange-rate will particularly help optimize resource allocation between tradable sectors and non-tradable sectors, thus helping reorient employment to move to service industries. In general, pushing ahead exchange-rate reform has more pros than cons in terms of the impact on exports and employment.

How to make exchange rate policy work with other policies to promote economy restructure?

Exchange rates can play an active role in improving the international balance of payments, boosting domestic demand and adjusting economic structure.

However, the structural problems that China’s economy faces can’t be solved simply by the exchange rate, and other policies are needed to coordinate efforts. China will further adjust income distribution, boost household income, spur consumer spending, improve the social safety net and encourage private investment, especially in the service sector.

China will further improve the resource-pricing mechanism, promote imports and facilitate overseas investment and households foreign-exchange use. During the yuan reform process, China will also strengthen the monitoring and regulation of capital flows and crack down on illegal foreign-exchange flows.

--Li Yanping and Jessica Zhou in Beijing. Editors: Joshua Fellman, John Liu

To contact Bloomberg News staff on this story: Yanping Li in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

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