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Progress of forex reform
2006-07-21
China Daily
One full year into a managed floating exchange-rate regime, China has become more confident about gradually introducing flexibility in pricing its currency, the renminbi.
But Chinese businesses still have a lot to do to brace themselves for the foreign exchange risks they will eventually face.
With the Chinese economy roaring ahead, it is now fairly certain that the country has survived the impact of breaking its decade-long currency peg to the US dollar better than expected.
Latest statistics indicate that the country's gross domestic product soared 10.9 per cent in the first half of this year. In particular, the country's trade surplus has risen to about US$61.5 billion so far this year, up 55 per cent from a year earlier and on a steady pace to surpass last year's record of US$102 billion.
Such an economic acceleration propelled by strong investment and trade growth defies almost all previous forecasts. This is because policy-makers and economists have more or less factored in the impact that the renminbi's gradual rise since last year will have on China's trade surplus this year.
On this day last year, China replaced the renminbi's 11-year-old peg to the US dollar with a link to a basket of currencies, and allowed a one-off 2.1-per-cent appreciation of the Chinese currency. Under the new floating exchange-rate regime within a very narrow band, the renminbi has slowly but steadily rose by about another 1.5 per cent.
Though such a pace of revaluation may not satisfy those countries that have never stopped pressing China to further raise the renminbi's value against the US dollar, the new exchange rate regime will enable the country to gradually reduce its trade imbalance with the rest of the world.
Worries about a floating renminbi eroding the already-thin profit margin of many domestic exporters had once prevented the Chinese authorities from taking the plunge to undo the previously rigid foreign exchange regime.
Yet, the record-breaking trade surplus only proved that the country's trade sector was more resilient than expected when dealing with the rise in the value of the renminbi.
As an emerging global manufacturing centre, China is bound to benefit more from its comparative advantage in terms of inexpensive labour. A continuous inflow of foreign investment will make the value-added processing trade a bigger source of China's trade surplus.
In a bid to improve its balance of payments, the country has also come up with a number of policies concerning the use of foreign exchange to facilitate Chinese enterprises' overseas expansion.
As the Chinese economy is increasingly integrated into global markets, it becomes imperative for domestic companies to think and compete globally.
However, only a few Chinese companies appear capable of hedging against currency risks.
The Chinese authorities have again recently ruled out another one-off appreciation of the renminbi. And the Chinese currency's 3.5-per-cent rise against the US dollar in the past year has not made a big dent in domestic enterprises' profits. But that is not a reason for Chinese businesses to drag their feet in preparing themselves for significant currency fluctuations.
One year on from China's adoption of a managed floating exchange-rate regime, no one should have any more doubts about the Chinese Government's resolve to press ahead with foreign exchange reform at its own pace.
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