China to further reform of yuan exchange rate formation mechanism

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China would continue to further the reform of the formation mechanism of its currency (RMB) yuan exchange rate, but a sharp rise in the value of the currency would damage the Chinese economy, a senior official of the People's Bank of China (PBOC), China's central bank, said on Thursday.

"Chinese Premier Wen Jiabao said recently that a steep appreciation of yuan would cause social unrest and serious unemployment problem," Yi Gang, vice governor of the POBC, made the remarks at a Thursday seminar, one part of the International Monetary Fund and World Bank annual meetings program.

Yi contended that although some currencies had depreciated against the U.S. dollar during the financial crisis, China kept its currency basically stable, greatly contributing to the global economic recovery.

China announced in June this year that it would further the reform of the formation mechanism of the yuan exchange rate to improve its flexibility.

Yi noted that Chinese enterprises were still mostly at the lower ladder of the global industry chain. China has registered surplus in trade in goods, but deficits in services trade, and had surplus in processing trade with deficits in general trade.

China further deepened the reform of the yuan exchange rate mechanism in July 2005. The yuan has appreciated by 22 percent against the U.S. dollar since then. During this period of time, however, China's trade surplus against the United States has still increased by a large margin, Yi said, adding that yuan appreciation cannot help the United States to solve its trade surplus problem.

"We have had surplus in trade with the U.S. and the EU, but deficits in trade with South Korea, Japan and the Association of Southeast Asian Nations (ASEAN). Doesn't all this show that it is an issue of trade structure instead of a mere exchange rate?" Wen said earlier this week in Brussels.

China has made big efforts to invest in social safety network building, infrastructures, urbanization process, environmental protection in recent years, to stimulate domestic consumption, industrial restructuring and boost domestic demand, Yi added.

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