I. How is the past and present of China's exchange rate system?

Answer: Before 1994, China had experienced in succession a fixed exchange rate system and a double-track exchange rate system. After the merger of the exchange rate systems in 1994, China instituted a managed floating exchange rate system based on market supply and demand. Enterprises and individuals bought foreign exchange from and sold it to the bank according to regulations, inter-bank transaction was conducted in the foreign exchange market to form a market exchange rate. The central bank set down a fixed exchange rate floating limit and maintained the stability of the RMB exchange rate through regulating the market. Practice has proved that this exchange rate regime conforms to China's national condition, and has made positive contributions to the sustained and rapid development of China's economy and to maintaining the financial stability of the regional and even the world economy.

Before 1997, the RMB exchange rate rose on the basis of stability, people at home and abroad had growing confidence in the RMB. Later, however, due to the eruption of the Asian financial crisis, in order to prevent a deepening crisis possibly caused by alternate devaluation of the currencies of neighboring Asian countries and regions, China, as a large responsible country, took the initiative to narrow the RMB exchange rate floating scope. Along with the gradual weakening impact of the Asian financial crisis, in recent years, China's economy has experienced sustained, steady and rapid development, economic structural reform has witnessed continuous deepening, new progress has been made in the financial field, foreign exchange control has been further relaxed, foreign exchange market construction has undergone constant development in depth and breadth--all these have helped create conditions for improving the RMB exchange rate formation mechanism.

II. Why is it necessary to better reform of the RMB exchange rate formation mechanism?

Answer: Improving reform of the RMB exchange rate formation mechanism is the inherent requirement for the establishment and perfection of the socialist market economy system, for giving full play to the market's basic role in resources allocation, as well as an important content of deepening reform of the economic-financial system and strengthening the macro-control system, it complies with the requirements of the Party Central Committee and the State Council concerning the establishment of a managed floating exchange rate system based on the market, improvement of the RMB exchange rate formation mechanism and maintenance of a basic stability of the RMB exchange rate at a rational, balanced level, and conforms to China's long-term and fundamental interests, it facilitates implementation of the concept of scientific development and is of important significance to promoting socio-economic all-round, coordinated and sustainable development.

Pressing ahead with reform of the RMB exchange rate formation mechanism is the necessity for alleviating unbalanced foreign trade, expanding domestic demands as well as upgrading enterprises' international competitiveness, and raising the level of opening to the outside world. In recent years, the continuous expansion of China's double surplus in current account and capital account has aggravated the unbalance of international payments. At the end of June 2005, China's foreign exchange reserve hit US$711 billion. Foreign trade surplus has rapidly expanded and trade frictions have been further exacerbated since the beginning of this year. Appropriately adjusting the level of the RMB exchange rate and reforming the exchange rate formation mechanism helps implement the sustainable development strategy based on domestic demands and optimize resources allocation; contributes to enhancing the independence of the monetary policy, and raising the initiative and validity of financial control and regulation; helps maintain a basic balance of imports and exports and improve trading conditions; it is conducive to keeping price stability and reducing enterprise cost; it helps spur enterprises to change their operational mechanism, enhance their own innovative capability, quicken the transformation of foreign trade growth pattern and improve their international competitiveness and risk-resistance ability; it helps optimize the foreign capital utilization structure, improve foreign capital utilization efficiency; it is conducive to making full use of both domestic and foreign resources and both home and international markets and raising the level of opening to the outside world.

III. What are the main objectives and principles for bettering reform of the RMB exchange rte formation mechanism?

Answer: The general objective of RMB exchange rate reform is to establish a sound managed floating exchange rate system based on market supply and demand and to maintain a basic stability of the RMB exchange rate on a rational and balanced level.

RMB exchange rate reform is required to stick to the principle of initiative, controllability and gradualness. Initiative mainly means deciding on the method, content and opportunity for exchange rate reform in light of the needs for China's own reform and development. Exchange rate reform requires giving full consideration to the influence on macroeconomic stability, economic growth and employment. Controllability means that the change of RMB exchange rate is controllable in macrocosmic administration, it should help promote reform and must not run out of control to avoid the emergence of financial market instability and major economic fluctuations. Gradualness means giving full consideration to the bearing capacity of various quarters and pushing forward reform step by step in light of market change.