IV. What are the contents and characteristics of the new RMB exchange rate formation mechanism?

Answer: The contents of the present reform to the RMB exchange rate formation mechanism are: The RMB exchange rate is no longer pegged to the single US dollar, but rather, in light of the actual condition of China's foreign economic development, a number of principal currencies will be chosen and given appropriate weight to form a package of currencies. In the meantime, in light of domestic and foreign economic and financial situation, based on market supply and demand and in reference to a package of currencies to calculate changes in multilateral exchange rate indexes of the RMB, exercise management and regulation on the RMB exchange rate so as to maintain a basic stability of the RMB exchange rate on a rational and balanced level. Making reference to a package indicates that changes in the exchange rates among foreign currencies will affect the RMB exchange rate, but making reference to a package is not tantamount to keeping watch on a package of currencies, there is also the need to take market supply-demand relationship as another important basis by which to form a managed floating exchange rate.

Calculated on the basis of a rational, balanced level of exchange rate, the RMB to the US dollar is revaluated by 2 percent on the very day, i.e., one US dollar to 8.11 yuan. This adjusted rate is determined mainly by the degree of China's trade surplus and the need of structural adjustment, at the same time, domestic enterprises' adaptability to structural adjustment is also taken into account.

V.Why present opportunity is chosen for reforming RMB exchange rate formation mechanism?

Answer: On the RMB exchange rate issue, the Chinese government has always chosen an exchange rate system and policy suited to China's national conditions by adhering to an independent, highly responsible attitude and persistently proceeding from China's fundamental interests and the reality of its socio-economic development. Now is fairly good opportunity for bettering reform of the RMB exchange rate formation mechanism. At present, China has gradually decontrol its foreign exchange management, constantly strengthened construction of the foreign exchange market and gradually popularized the market implement, and has achieved substantive progress in various financial reforms; macro-control has seen remarkable result, the national economy has maintained a good momentum for steady and rapid growth; the world economy is operating steadily, and the interest rate of US dollar is rising stably. All these have helped create favorable conditions for reform of the RMB exchange rate formation mechanism and laid a solid foundation, making it possible to achieve the anticipated reform result.

VI. How should various departments cope with the challenges brought by bettering reform of the RMB exchange rate formation mechanism?

Answer: Exchange rate formation mechanism reform would produce certain influence on economic growth and employment in a short period of time. But generally speaking, advantages outdo disadvantages. We will press forward RMB exchange rate formation mechanism reform in an active and sound way, vigorously create favorable conditions, guide enterprises to strengthen structural adjustment and steadily go through the reform and adjustment period. Banking and foreign exchange control departments should further improve financial services, step up foreign exchange administration and provide powerful support for enterprise development. Enterprises should actively quicken the pace of structural adjustment, transform the operational mechanism and enhance adaptability to exchange rate floating and ability to deal with exchange rate change.

VII. Will major fluctuations occur to RMB exchange rate after the introduction of this reform?

Answer: The general objective for the reform of RMB exchange rate 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. A major fluctuation of RMB exchange rate will exert great impact on China's economic and financial stability and so does not conform to China's fundamental interests. This situation will absolutely not emerge with a better reformed RMB exchange rate formation mechanism.

Firstly, after the RMB exchange rate formation mechanism is reformed, the RMB will no longer be pegged to any kind of single currency, instead, adjustments will be made on the basis of market supply and demand and in reference to a package of exchange rates. The mutual changes in the exchange rates of principal currencies on the international market objectively reduce the fluctuations of the RMB exchange rate.

Secondly, along with the enhancement of the basic role of exchange rate and other economic levers in the allocation of resources, and with the further straightening out of the foreign exchange supply-demand relations and the gradual establishment and perfection of the regulating mechanism of international payments, there tends to be a basic balance of international payments, thus laying a solid economic base for the stability of RMB exchange rate.

Thirdly, China will make active effort to properly coordinate its macroeconomic policy, steadily push forward various reforms, thereby providing a good policy environment for the stability of RMB exchange rate.

Finally, the People's Bank will strive to raise its level of control and regulation, improve foreign exchange management, and maintain a basic stability of RMB exchange rate on a rational and balanced level.

2005-7-22