As a reform research institution based in Hainan, China Institute for Reform and Development (CIRD) has been providing intellectual services for the Boao Forum for Asia over the past six years. These services include recommending key topics for and drafting comprehensive summary reports on its annual conferences as well as drafting minutes for its annual board meetings and annual member conferences. The following selections are CIRD opinions on this year's hot economic issues:
RMB patience is a virtue
The renminbi exchange rate has always been a sensitive issue, but judging from recent exchange rate reforms, decision makers in the Chinese Government have reached consensus for reform. The general posture is that a market-oriented and more flexible exchange rate mechanism should be further improved, but since this reform covers a wide range of issues and has far-reaching influences, patience is required.
According to the established mechanisms, the renminbi exchange rate may appreciate at an annual rate of less than 5 percent during 2006-10. While reform of the renminbi exchange rate has been incorporated into the 11th Five-Year Plan (2006-10), the major problems China now faces are an excessive trade surplus and the rapid increase of foreign exchange reserves.
As regards the latter, China has to expand its money supply. The government work report delivered by Premier Wen Jiabao at the Fifth Session of the 10th National People's Congress states that, "effectively addressing the problem of excess liquidity in the banking system" is among the major tasks of the Chinese Government. In order to relieve excess liquidity, the central bank has increased the reserve requirement ratio twice since the beginning of the year.
The government also strengthened its efforts at reigning in excess liquidity following the Spring Festival---when banks rush to supply loans---hoping to control growth of loans and fixed assets investments within reasonable limits by raising the reserve requirement ratio. In this respect, if excess liquidity is not reduced by raising the reserve requirement ratio, the renminbi would face heavier pressure to appreciate, and vice versa.
Moderate renminbi appreciation is generally beneficial to the Chinese economy. First, it helps relieve excess liquidity and pressure from over-heated investments and housing price hikes. Second, if companies have expectations about stable renminbi appreciation--although it may influence the exports of some companies--this can force them to improve internal management practices and push them to transfer price advantages into new competitive advantages, aiding the economy in the end. Third, appreciation can correct distorted exchange rates, preventing Chinese companies from producing so-called cheap products through consuming massive resources.
Moderate renminbi appreciation is beneficial to other Asian nations. It increases the competitiveness of Asian exports; and in turn, China imports more from across Asia. Renminbi, if allowed to appreciate at a moderate rate, also benefits the global economy. Moderate appreciation will not be serious economic disturbances in China and the economy will retain a steady growth rate, in essence buoying the growth of the global economy.
Financial reforms gain pace
Financial reform has recently quickened in China, with the banking, securities and insurance sectors leading the way. The introduction of the shareholding system in state-owned commercial banks has led several state-owned commercial banks to list on overseas stock exchanges. The reform of the shareholder structure is close to completion. Other reform success has occurred within the property rights system, corporate governance and with internal control mechanisms. Since the reform of the exchange rate in 2005, the renminbi exchange rate has gained flexibility. An insurance sector reform blueprint has been formulated and rapid development is expected in this arena.
The national financial work conference, occurring once every five years, was held on January 19th, 2007 in Beijing. Four days later, the Political Bureau of the Central Committee of the Communist Party of China met to discuss a strategic plan for financial reform. The Chinese financial industry is at an important turning point and a crucial development stage. Momentum towards its reform is expected to continue.
In the latest government work report, Premier Wen Jiabao laid out six tasks developed to accelerate financial reform in 2007. The following summarizes Premier Wen's remarks:
The first task is to deepen reform of state-owned banks. This will be led by transforming state-owned commercial banks to joint-stock companies. Shareholding systems will be introduced with the Agricultural Bank of China. Additional reforms will focus on the China Development Bank.