China to continue exchange rate reform: official

Updated: 2010-07-28 17:10
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BEIJING - A senior Chinese central bank official said Wednesday China will continue to reform its exchange rate formation mechanism to consolidate coordinated and sustained economic growth amid a rise in production costs.

"The current adjustment in the price of production factors and the reform of the exchange rate formation regime are in accordance with the correct direction of our country's macro control policy," wrote Hu Xiaolian, deputy governor of the People's Bank of China (PBOC), China's central bank, in an article published on the bank's website.

The article was Hu's third elaboration on China's exchange rate policies in the past week.

The PBOC announced June 19 it would further reform the Renminbi exchange rate formation mechanism and allow greater exchange rate flexibility.

The prices of factors of productions - land, natural resources, environmental protection, and in particular labor - have risen rapidly in China.

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Local governments have raised their minimum wage levels by 10 percent or more this year after workers in manufacturing industries went on strike demanding higher pay.

In the article, Hu said the reform of the exchange rate formation regime and rising production costs will accelerate China's technological innovation, reduce energy over-consumption and promote economic restructuring and sustained economic growth.

In the next five to ten years, she said, China's working population will fall and the current labor over-supply situation will reverse, which will put pressure on wages.

Irrespective of whether China maintains equilibrium in its international balance of payments or not, hikes in production costs in China will continue as the global price for energy resources rises over the long term, Hu said.

She said greater flexibility in the Renminbi exchange rate will create a stable and low-inflation environment for the adjustments of production costs.

A stronger yuan will lower the price of imported goods and materials, offsetting in part some of the inflationary pressure following the hikes of production costs.

Production factors' price increases will also help ease yuan appreciation expectations, reduce the inflow of short-term capital and relieve international pressures, which will provide a better environment to accelerate the yuan exchange rate reform  Hu said.

Therefore, the exchange rate reform and the adjustment in production factors' prices can be better coordinated, she said, adding: "This is essential for the stability and development of the macro economy."