A senior official of China's central bank said in Washington Sunday that the operation of the new renminbi (RMB) exchange rate regime has been smooth and stable since the exchange rate reform was adopted in July.

"Financial institutions and export and import enterprises have basically adapted to the flexibility of the exchange rate regime and show strong confidence in their future business," said Hu Xiaolian, deputy governor of the People's Bank of China.

Hu made the remarks at a seminar hosted by JP Morgan Chase in Washington while she was attending the annual meeting of the International Monetary Fund and the World Bank.

Hu said China will continue to improve the market-oriented exchange rate regime with greater flexibility and keep the RMB exchange rate basically stable.

In pushing ahead with the RMB exchange rate reform, China will continue to uphold the principles of "independent initiative, controllability and gradual progress," she stressed.

A series of match-up measures, such as deepening the reform of the foreign exchange administration system, speeding up the development of the foreign exchange market, and providing risk-hedging instruments for market participants, have been taken since the exchange rate reform was launched in July, said the official.

The RMB exchange rate has witnessed both ups and downs with a two-way moderate fluctuation after the peg to the dollar was scrapped, said Hu. From July 22 to Sept. 21, the closing trading rate of RMB against the US dollar was fluctuating between 8.0871 and 8.1128, with a range of 257 basis points.

In contrast, the fluctuation range of the rate for the whole year was only 10-plus basis points before the reform, she noted.

The official also said the formation mechanism of the RMB exchange rate against the US dollar in the inter-bank market and the floating band remain unchanged.

On Sept. 23, the People's Bank of China announced that the floating band of RMB trading rates against non-US dollar currencies was expanded from 1.5 percent to 3 percent.

"This move doesn't mean fundamental change in the RMB exchange rate formation mechanism," said Hu.

She said expanding the floating band of RMB rates against non-dollar currencies is intended to give more room for commercial banks to control risk and wipe out the arbitrage opportunity.

"In response to some problems experienced by banks in their quoting rates to clients, some adjustment was made to expand the buying-selling rates spread, which is now basically consistent with other countries' practice in the range of quotation rates," she said.

"This move serves to give commercial banks more discretion in pricing so that they can effectively balance the returns with cost and manage risks," Hu added.

She said the move may also increase transaction costs of speculators, thus contributing to basically maintaining the stability of the RMB exchange rate.

Hu said the move, a technical step to improve the RMB exchange rate management mechanism, is in the long term conducive to allowing the market to play a bigger role in deciding exchange rates and facilitating risk management by financial institutions and enterprises.

Source: Xinhua