China's domestic factors, not the "outside pressure," are determining the pace of the country's reform of the foreign exchange system, Beijing-based analysts say.

"It's necessary to allow the Chinese currency RMB (Renminbi) to float in a more flexible way in order to form a more flexible exchange mechanism in the future," said Mei Xinyu, a researcher with the Ministry of Commerce in an interview with Xinhua.

The RMB, or yuan, should appreciate from the long term point of view, he said. However, it's not beneficial to China if the RMB appreciates "dramatically" and "in a very short period of time."

Zuo Xiaolei, a chief economist with Galaxy Securities, also told Xinhua, "The exchange rate cannot be adjusted under the pressure from the outside world,"

She said that the reform, if conducted now under the pressure from the United States and when "hot money" is still speculating on the appreciation of RMB, would very likely lead to the over- appreciation of the Chinese currency, not the "greater currency flexibility" as expected by the Chinese government.

Compared with the reform of the foreign exchange system, it's more urgent for the Chinese government to solve its domestic issues, including enhancing the competitiveness of Chinese banks before fully opening the sector to foreign banks in 2006 and stepping up adjustment of the country's product structure to cope with increasing foreign trade disputes, she noted.

She warned of the risk of introducing the reform of the exchange rate hastily, saying that "It takes time for China to solve its domestic problems."

She said although it's hard to give an exact timetable for reforming China's foreign exchange system, an appropriate time is needed. That is when the bubbles in the capital market (mainly the real estate market) are blown off, the inflow of "hot money" into China is checked and the pressure, under which the RMB would appreciate, is eased.

"Pressure from the outside world would only make China's reform slow down," she said.

On Tuesday, US Federal Reserve Chairman Alan Greenspan called for a more flexible exchange rate for the Chinese currency even as he believed that the impact of any change on the American economy would be minor.

Greenspan told a Beijing banking conference via satellite from the United States "The issue of allowing flexibility in some form in the RMB strikes me as very much to the advantage of China."

Analysts, however, argued that it's wrong to interpret Greenspan's remarks as suggesting the revaluation of the Chinese currency.

Chinese central bank governor Zhou Xiaochuan also told the conference that China needs time to bring about greater currency flexibility, citing employment, economic growth and reform of the state-owned commercial banks as factors that should be considered carefully before taking any move to reform the exchange rate.

"We will push forward the reforms step by step. Past experience has told us that gradual reform is successful," Zhou said

Mei Xinyu imagined a picture after the revaluation of the Chinese currency, saying that the appreciation of RMB would not only hurt the competitiveness of Chinese products on the international market, but also have a negative impact on some foreign-funded export-oriented enterprises in China.

The move would further accelerate the unbalanced development of different areas in China and stimulate the country's imports of some luxurious goods and raw materials, which are not good for improving the living standard of the ordinary Chinese citizens, he said.

Besides, he added that more international "hot money" is expected to flow into China's already overheating sectors, such as the property market, and further produce bubbles in the economy. This would affect and destabilize China's financial system.

In May, the Chinese government denied rumors that the RMB would appreciate soon, noting that it would not bow to any foreign pressure to reform the country's decades old foreign exchange system.

The yuan is currently pegged at 8.28 to one US dollar and China has come under pressure from trade partners, mainly the United States and the European Union, for changing an exchange rate that is seen as giving its exporters an unfair advantage.

Source: Xinhua