China's current foreign exchange system is in line with the nation's economic reality, Premier Wen Jiabao said yesterday.

US Treasury Secretary John Snow (L) talks with Premier Wen Jiabao in Zhongnanhai, Beijing on Wednesday, September 3, 2003. [newsphoto.com.cn]

The country will improve the exchange rate mechanism of its currency - known as renminbi or yuan - according to development level, economic performance and conditions of its balance of international payments, Wen told visiting US Treasury Secretary John Snow in Beijing.

The process of seeking a better exchange rate mechanism will move forward along with reforms of the financial sector, Wen said.

Prior to Snow's visit and apparently in response to wide speculation that the renminbi might be allowed to appreciate, Wen said the currency's value will remain stable.

The renminbi's exchange rate is basically decided by supply and demand on the foreign exchange market. But since the 1997-99 Asian financial crisis, the central People's Bank of China has enforced a narrow fluctuation band by selling or buying foreign currencies.

In a detailed explanation of China's position on the renminbi issue, central bank governor Zhou Xiaochuan was quoted as saying the yuan will be floated - but only when economic conditions are right.

Zhou said China will not let the market play the decisive role in determining its exchange rate until the economic impact of China joining the World Trade Organization (WTO) has settled down. These changes include the opening-up of the trade sector and reforms of State-owned banks, Zhou told the Beijing-based Financial News.

He said citing China's trade surplus as the reason for the renminbi to go up is not the right approach because China's slashing of trade tariffs and its robust economy have resulted in surging import growth.

Although China is still running a trade surplus, import growth has been much faster than export growth since the beginning of this year, Zhou noted.

"If this momentum continues, China will reach a balance between exports and imports in one or two years," he said.

"It is still too early to say whether the renminbi is overvalued or undervalued. And it would be even more unwise to make adjustments (to its exchange rate) at the moment."

Some US manufacturing enterprises have been asking their government to press China for a revaluation of the renminbi because they said the renminbi's "undervalued" exchange rate has given Chinese exports an "unfair" competitive edge and caused unemployment in the US.

Zhou disagreed, arguing that a country's relative competitiveness in international trade is generally not determined by the exchange rate.

In addition, "both economics and international experiences indicate the issue of employment in a large economy should be addressed mainly by structural changes instead of trying to pass on the problem to others," Zhou said.

Zhou also predicted China's financial authorities will find solutions to counter the influx of "hot money" pouring into the country from investment speculators.

The central bank recently hiked its required deposits for commercial banks, a move Zhou said represents an effort to solve the problem of excessive money supply growth brought about by the inflow of hot money.

During his meeting with Snow, Premier Wen also talked about Sino-US relations.

He said the leaders of the two countries perceived and handled bilateral relations from a strategic level, which guaranteed the smooth development of China-US relations.

Fruitful co-operation on such issues as economy, trade, anti-terrorism and the Korean Peninsula nuclear issue proved the two nations share many common interests and that continuous enhancement of links would be conducive to peace and economic growth, Wen said.

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