No Shock Therapy in China's Exchange Rate Reform

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Last updated at: (Beijing Time) Saturday, August 09, 2003

No Shock Therapy in China's Exchange Rate Reform

A leading Chinese banking expert says China should maintain a stable exchange rate policy, warning that drastic amendments of the reform process would adversely affect the national economy.

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A leading Chinese banking expert says China should maintain a stable exchange rate policy, warning that drastic amendments of the reform process would adversely affect the national economy.

Tang Xu, director of the Graduate School of the People's Bank of China, said in an exclusive interview with Xinhua that China's exchange rate system was appropriate to the country's financial situation. The stable currency policy enabled China to successfully stabilize the Renminbi (RMB) and withstand the impactof the Asian financial crisis in 1997.

To a profound extent, the stability of the exchange rate safeguarded the country's daily financial operations, stressed Tang.

After 1994, fundamental changes were seen in China's foreign exchange system, as the government merged the "official" and market exchange rates into a unified one based mainly on market demand and supply, under a single, managed floating exchange rate system,Tang said.

The gradual and evolutionary reform of China's exchange rate system also helped establish foreign investors' faith in the valueof the RMB and consolidate their determination to boost investmentin China, he said.

If China freed the exchange rate, the speculative "hot money" would advance into the country's foreign exchange market and the RMB would surely fluctuate severely, Tang said.

"It would be a disaster, since China's financial capability to withstand the exchange rate upheaval is so weak," Tang said, warning that the regular financial operations would be in disorder.

China, unlike developed countries whose financial sectors are able to prevent and dissipate exchange rate risks, would bear too much risk to let the RMB float freely, Tang said.

He suggested that China continue to focus on the establishment of risk management mechanisms within the banking system and improve corporate governance.

However, Tang also agreed that a stable exchange rate did not necessarily mean a fixed one. He predicted that RMB could eventually be convertible under the capital account.

"There is no timetable for realizing the RMB's convertibility under the capital account, but at the right time, there will be one," Tang said.

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