Any adjustment on the RMB exchange rate policy should be based on the consideration of three aspects. First, a sound macro-economy, a solid market mechanism and a healthy financial system should all be there. Second, a right reform roadmap is necessary which helps to keep yuan basically stable at a rational and equilibrium level. And last but not the least, the influence of the changes on the regional and global economy must be taken into account.

Zhou Xiaochuan, Governor of the People's Bank of China, made these remarks in London during the G7 conference. In the mean time, he does not think that yuan is not as strong as it actually is. he said that the surplus for the current account which stood at some 20 billion USD was basically balanced as it only accounted for less than 2 percent of either the 1.15 trillion USD worth of foreign trade or GDP. Although forex reserves rose sharply, he explained, there were various reasons and it was generally reasonable.

Zhou refused to give any timetable for any change of the interest rate policy, quote, "China will reform its exchange rate regime in the interest of its reform and development."

He claimed that new concrete progress were being made on reform of domestic commercial banks, relaxation of unnecessary control over forex, and improvement of the forex market. He expected a prospect of a scientific and controllable mechanism for the influx and outflow of capital on the condition that risks are prevented effectively.

China always regards itself a developing countries although its economy is developing the fastest in the world. So it is still waiting for a ripe time to adjust its exchange rate policy on the condition that its economy is not affected.

The massive hot money swarmed into China last year also raised concern. Experts worry that too early moves toward more flexible exchange rate policy will encourage more tentative speculation on yuan revaluation.

Most predictions set China's economic growth at 8 to 9 percent for 2005. But uncertainties still remain ahead. One of the most concerned issues is the rebound of fixed asset investment. Another is the price curves. The pressure of price hike is still there. And making the domestic demand the true driving force of the economy needs more government's efforts.

China has adopted a package of measures to steer its economy toward a way of sustainable, healthy and harmonious development. The mild interest rate increase at the end of last October, which came as a surprise, indicated that prices would gain ground in the macro-control policy framework.

Since then discussions about more similar moves by the central bank have caught even more fire. There is no doubt that China will use tools of prices, including interest rates and exchange rates, more to leverage its economy. The long report that PBOC issued for the first time at the end of last month confirmed that. By saying that the function of the price mechanism would be more evident when the economy was more market oriented, Zhou Xiaochuan inferred the same meaning.

However, he will be very careful to have the interest rates dependent more on the market. As the report says, the process will be "progressive". The roadmap stresses the pressing task of improve the pricing ability of Chinese commercial banks.

This distinguishes this round of macro-control from the previous ones for which the monetary policy focused more on quantity tools. In recent years, the central government has managed to have its indirect control system and policy transmission system work more effectively. Commercial banks have improved their ability of pricing and risk management. Micro-economic objectives also have developed enough sensitivity toward the monetary environment.

The central bank's efforts on adjusting the economy with operations of interest rates last year have been applauded widely home and abroad. This can avoid the side effect of administrative measures, such as one-cut-for-all or an abrupt brake on one hand. And it is likely to have positive influence on the banking system and industries on the other to avoid new bad assets caused by an "abrupt brake".

It is natural that the market has high expectation for alteration of interest rates and exchange rates. But much has to be considered before any actions can be taken on interest rates, including the situation of consumer price index, investment, consumption, the international balance, as well as the macro-economic policy, social capital supply and interests of the government, banks and individuals. And even if a move is planned, it will be moderate.

By People's Daily Online