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The People's Bank of China (PBC), the country's central bank, yesterday released a report on the implementation of monetary policy in the fourth quarter of 2005, including stabilizing renminbi (RMB) valuation and improving interest rate mechanisms.

The following are the key extracts of that report.

Current situation conducive to economic growth

The current domestic situation is conducive to the stable and healthy development of China's economy.

Urban and rural incomes are growing rapidly, which will stimulate consumption.

The confidence index of urban residents about their future income grew 1.2 percent in the fourth quarter of 2005.

Although the problem of excess supply exists in many fields, fixed assets investment in China is still likely to rebound, so uncertainties still lie in investment, the report said, recommending the adjustment of the investment structure.

The world's economy will continue to grow, benefiting Chinese exports, which still face risks in relation to oil price hikes and increasing trade protectionism.

The PBC said that some fundamental problems in economic operations have not been solved, and suggested that the country not rely too much on investment and export growth. It should also avoid traditional production methods that give rise to serious pollution and enormous energy consumption while generating only low profit.

By the end of 2006, China will fully open its financial markets according to its World Trade Organization (WTO) commitments, which will introduce further challenges to domestic financial companies. 

RMB to remain stable in 2006

The value of the RMB will stand at a reasonable and balanced level.

It pledged to upgrade the managed, floating exchange rate system to cater to the needs of China's economic development and financial stability, in an "independent, controllable and progressive" way.

US manufacturers argue that the RMB is kept "artificially lower" to make Chinese goods cheaper for US consumers, and US products more expensive in China, and the US government says China accounted for a quarter of its trade deficit last year.

Pressure on China for another RMB revaluation is reportedly increasing.

But the PBC says: "The exchange rate plays only a role in adjusting international payments. Other factors come into play as well."

Policies on foreign trade, resource pricing and foreign exchange management should combine to promote the balance of international payments.

The RMB has gained nearly 3 percent against the US dollar since its July 21 revaluation, trading at a central parity rate of 8.0485 to the dollar on Tuesday.

Early this year, China began a new policy of calculating the RMB's value against the US dollar using a weighted average of the prices given by major commercial banks. The highest and lowest offers are excluded from the calculation.

Giving banks a role in setting the new daily benchmark, or the central parity rate, is seen as a sign that the PBC is willing to allow market forces a greater role in daily trading, analysts acknowledge.

Market forces will play a "fundamental" role in the determination of the RMB's value.

A central bank survey last November of 1,113 enterprises with foreign trade rights showed that Chinese enterprises responded positively to the new exchange rate mechanism.

Nearly three-quarters of these enterprises said their exports either rose or were stable in November.

Earlier figures showed that trade surplus prompted China's foreign exchange reserves to surge to US$818.9 billion by the end of last year, second only to Japan.

The PBC has stressed that a floating RMB is not simply one that will appreciate, and the prevailing view among industry watchers is that the RMB will strengthen gradually this year.

Uncertainty over future price trend

The probable investment rebound will lead to rising prices of raw materials, fuel and power, which will be further exacerbated by the ongoing reform of China's resource-pricing systems concerning fuel, water, power, natural gas and coal.

The prices of durable consumer goods as well as steel, iron, aluminum and cement products, however, will probably fall due to oversupply, dragging down the producer price index (PPI) and consumer price index (CPI).

Some 41.7 percent of urban residents have predicted price hikes, up 5.5 percentage points from the previous quarter, and 4.3 percent of urban residents predicted price drops, down 1.7 percentage points from the previous quarter.

China to improve interest rate formation mechanism

China will improve the interest rate mechanism by developing a market benchmark system.

Two of the major monetary policies for 2006 are to gradually promote market-oriented interest rate reform and improve their formation mechanism.

It will also simplify the terms and varieties of benchmark interest rates for loans, continue market-oriented reform of interest rates for long-term and lump sum deposits, and offer derivatives of interest rates after careful research.

There are also plans to upgrade the interest rate pricing capability of commercial banks and rural credit cooperatives.

(Xinhua News Agency February 22, 2006)