China will continue its reform of the RMB exchange rate formation regime in the direction of market operation, President Xi Jinping said in a written interview with the Wall Street Journal published on Tuesday.[Special coverage]
"China has been working to improve market-based RMB exchange rate regime," Xi said, adding that recent measures to improve the quotation of the RMB central parity was a case in point, "as it gives greater say to the market in deciding the exchange rate."
Given the complexities in the current international economic scene and financial market and the apparent divergence in market makers' expectations of the future trend of the RMB exchange rate, there had been a long-standing gap between the central parity and market exchange rate of the RMB, according to the president.
With improvements to the quotation of the RMB central parity, the RMB central parity will better respond to supply and demand in the foreign exchange markets, and systemically avert the sustained large gap between the RMB central parity and market exchange rate, Xi said.
Since the quotation of RMB central parity was improved on August 11, initial progress has been made in correcting the deviation, he added.
"Given the current economic and financial conditions at home and abroad, there is no basis for sustained depreciation of the RMB," Xi said.
China put forward the goal of convertibility of the RMB under the capital account back in the early 1990s. Over the past 20 years and more, China has been working toward this goal.
"Currently, there are only very few transactions that are still banned under the RMB capital account," Xi said, adding that China is advancing the convertibility of the RMB under the capital account in a steady and orderly manner.
As to a recent drop in China's foreign reserves, Xi said "this actually reflects improvement to the mix of local currency as well as foreign exchange assets and liabilities of domestic banks, enterprises and individuals.
Xi listed three main reasons for the drop:
First, some assets in foreign exchanges were transferred from the central bank to domestic banks, enterprises and individuals, including an increase of 56.9 billion U.S. dollars in the balance of foreign reserve deposits of domestic banks in the first eight months of this year, with a 27-billion-dollar increase in August alone;
Second, outbound investment by domestic enterprises has grown rapidly;
Third, domestic enterprises and other market entities are reducing foreign financing steadily, which helps reduce risks of high leverage operation and currency mismatch.
"These changes are normal capital flow, which is moderate and manageable," said the president.
He said foreign investors who aim at long-term gains are still investing in China.
"China's foreign exchange reserves remain abundant and is still very large by international standard," Xi said.
"With improvement to the RMB exchange rate regime and progress in RMB internationalization, it is quite normal that China's foreign reserves may increase or decrease, and there is no need to overreact to it," he added.
