Improving the mechanism that determines the exchange rate of the renminbi is critical to optimizing China's balance of international payments and ensuring healthy economic growth, a senior government official said Wednesday.

But that would require, first of all, further development of retail foreign exchange markets, reforms of the current mandatory bank settlement system and further progress in liberalization of capital accounts in order to "broaden the market basis'' for deciding the renminbi exchange rate, Guo Shuqing, director of the State Administration of Foreign Exchange, said in a statement published on its website.

Also, the number of institutional market participants needs to increase, and risk-hedging tools need to be developed before the floating range of the yuan exchange rate can be broadened moderately in the interbank market, he said.

And the central bank needs to improve fine-tuning methodologies and enhance supervision and market transparency to ensure forex markets' are stable.

"But the exchange rate mechanism reform should have the stability of the exchange rate as a precondition,'' Guo said. "We must actively promote the long-term fundamental stability of the renminbi exchange rate at appropriate and equilibrious levels.''

Further improvements to the exchange rate mechanism will also help China grasp a good opportunity to accelerate economic growth and its industrialization process, Fu Ziying, assistant minister of commerce, told a forum on financial markets yesterday.

But he cautioned that exchange rates and foreign trade policies need to work in concert to prevent major disruptions to foreign trade.

Fu predicted a US$15 billion trade surplus and US$50 billion of foreign direct investment for this year, and said the nation's foreign trade would grow by more than 8 percent next year.

Despite external pressure to revalue its currency, China has insisted that the current value of the yuan is appropriate and its stability is in the interest of not only China's economy, but the world economy.

Economists have said the anticipated appreciation of the currency would harm the Chinese economy and cost jobs. At the same time, it would not benefit some trading partners, like the United States, that have complained over trade deficits with China.

Guo also said that in the medium and long run, China would loosen convertibility restrictions under certain capital account entries "where conditions are ripe.''

Those include supporting direct investments by Chinese businesses in overseas markets, allowing selected multinationals to move idle funds out of China, supporting Chinese companies in recapitalizing their overseas subsidiaries, and permitting international financial institutions to issue renminbi-denominated bonds in the domestic market on a selective basis.

The completion of those measures will mark the realization of a "basic'' capital account convertibility, but that is still "a long period of time'' before full convertibility of the currency, Guo said.

China made the yuan convertible under the current account in 1996. But its still partly convertible under the capital account, with little or no restrictions on nearly half of the 43 capital account entries and nearly one fifth strictly controlled.

(China Daily December 4, 2003)