China's central bank said it will maintain the basic stability of its currency, while improving the flexibility of the renminbi.

In a statement published yesterday after its first quarter monetary policy meeting, the People's Bank of China (PBOC) said it would "further perfect the forming mechanism of renminbi exchange rate, broaden the foreign exchange market, increase the flexibility of renminbi exchange rate, and maintain the basic stability of renminbi at a reasonable equilibrium."

The bank noted that the financial system is operating soundly, the new renminbi exchange rate regime is functioning stably, and the exchange rate is stabilized at a reasonable equilibrium.

China surprised the market last July when it reformed a decade-old exchange rate regime, allowing the renminbi to appreciate by 2 per cent against the US dollar and linking the renminbi to a basket of currencies instead of the US dollar alone.

But it is still facing international pressure to let the renminbi appreciate further, although Chinese officials have been reiterating that the exchange rate regime will be made more flexible.

Two US senators, who drafted a bill that threatens to impose a 27.5 per cent tariff on imports from China unless the renminbi is allowed to strengthen substantially against the US dollar, are currently visiting China.

China will expand the foreign exchange market and allow more flexibility and fluctuation of the Chinese currency, Chinese Premier Wen Jiabao told a press conference at the end of a plenary session of the National People's Congress, China's legislative body, earlier this month.

The Chinese monetary authorities have been accelerating the construction of a more mature foreign exchange market by introducing derivatives such as forwards and swaps.

Some US economists have refuted accusations that China is manipulating its currency, noting the nation is being driven by rising protectionism.

The threat of higher tariffs on Chinese exports if China does not revalue its currency is just the beginning of mounting protectionism in the United States, which was signalled in preventing the acquisition of Unocal by a Chinese company and east coast shipping facilities by a Dubai company, Stephen Roach, chief economist of investment bank Morgan Stanley told a forum in Beijing on Monday.

US politicians fuelled the trend by playing "a classic political blame game," with China being increasingly singled out as the scapegoat, he said.

"The Sino-US relations are perhaps the world's most important bilateral economic relationship in the 21st century. That relationship is now at risk and, if not attended to, it could backfire, with significant negative impact on China, the United States, and the broader global economy," Roach was quoted by Xinhua News Agency as saying.

On the back of hefty surplus, China's forex reserves rose by 34.3 per cent year-on-year to US$818.9 billion at the end of last year, which was 17 percentage points slower than a year earlier.

But economists have said China's export competitiveness comes from other factors such as low labour costs, rather than exchange rate.

Source: China Daily