More flexible exchange rate helpful to imported inflation

Vice-governor of the People’s Bank of China Hu Xiaolian indicates in her article which concerning the reform of exchange rate regime and validity of monetary policy, that monetary policy should be conducted in consideration of price stability, economic growth, full employment and the balance of payments, the top four macroeconomic targets. But the focus should be laid to stabilize yuan’s rate, so as to prevent the risk of high inflation.  However, it would be helpful in relaxation of imported inflation with mild rise of domestic currency, just at the time inflation pressure thrives.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

In recent years, the nation’s validity of monetary policy has been faced with severer challenges from fast expansion of foreign exchange holdings. Current account surplus has kept growing ever since <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China to be the membership of WTO in 2001, serving the main source of international trade surplus. So, the matter, together with inflowing of foreign capitals, thus give rise to the issuance of basic currency.

She says exchange rate flexibility is helpful in improving the transmission mechanism of monetary policy. In experiencing the reform of yuan’s rate formation mechanism, under the principles of “initiative, progressive and controllable”, most of the enterprises, commercial banks and other macroeconomic main bodies have greatly increased the awareness of being subject to floating rate status, with enhanced ability facing with the changeable market, thus resulted in further growth of both money market and exchange market in depth and extent development.