China is working on a plan for a more flexible exchange rate for its currency, but the measures might come unexpectedly, Premier Wen Jiabao told a news conference following the close of this year’s session of the National People’s Congress.
China started to reform its exchange rate in 1994 and the work has never stopped, Wen told reporters in Beijing. The goal is to establish a market-based, managed and floating exchange rate, he said.
Wen pointed out that China is now laying a solid foundation for exchange rate reform. The necessary prerequisites include macroeconomic stability, growth and a healthy financial situation. While providing no details on a possible timetable, Wen criticized “some people (who) strongly demand that we raise the yuan’s value but haven’t given much thought to what sort of problems might ensue. This is very irresponsible.”
The yuan is now pegged tightly to the US dollar, and Washington and other trading partners are pressing China to let the yuan trade freely or at least appreciate. They claim the current rate is “too low,” giving Chinese exporters “an unfair cost advantage that harms foreign competitors.”
“We must take into consideration the national interest but also the impact (of the exchange rate reform) on  neighboring countries and the world,” he said.
In wide-ranging remarks, Wen also talked about the challenges of maintaining an economic expansion while controlling inflation.
He said China would maintain rapid economic growth this year after the world’s fastest-growing major economy registered a robust 9.5 percent increase in 2004.
But, he acknowledged, “There is a dilemma in the economy.”
A slow growth rate is harmful because it would make it more difficult to create jobs, increase revenues and engage in more social projects, while a too-rapid expansion would be difficult to sustain, he explained.
As Wen put it, the Chinese economy is like sailing against the currents: either it keeps forging ahead or it will fall behind.
The foundations for effective macro controls still aren’t fully in place, the premier said.
“It will be difficult to increase grain output and farm income, and the prices of capital goods are going up by bigger margins,” Wen said. “Investment growth in fixed assets may pick up again, as coal, electricity, oil and transportation are still in short supply.”
Power generation, for instance, grew 12 percent in the first two months of the year, but 25 out of the country’s 31 provinces, municipalities and autonomous regions still suffered from blackouts, which reflects a “continuous strain” in the economy, Wen said.
China began 2004 amid serious worries that the economy was dangerously overheated, with easy credit fueling production of factory goods and soaring investment in government infrastructure projects.
Inflation rose at an alarming rate, hitting a peak of 5.3 percent last July and August.
The runup prompted the central government to order energysaving measures and tell local officials to cut spending on unneeded factories, roads and other facilities. The bank interest rate was raised for the first time in nearly a decade.
Wen said China will continue its policy of developing the capital markets. While acknowledging the weak performance of China’s stock market for years, Wen vowed to improve the quality of listed firms, build an open, fair and transparent market, intensify supervision and crack down on irregularities.