By Bloomberg News

June 20 (Bloomberg) — The following is a translation of
portions of the question-and-answer-style statement on yuan
exchange rate reform issued by the People’s Bank of China today.

Is further yuan reform in China’s interests?

The decision to proceed further with yuan reform and an
improved managed-float exchange rate regime is based on China’s
conditions and development strategy. It is in line with reform
in the direction of a market-economy system, and with
“scientific” development. It is in China’s long-term and core
interest, as it can further integrate the country into the
global market.

First, it will aid China’s efforts on structural adjustment
and sustainable development. A floating exchange rate enables
flexible adjustments of relative price levels at home and abroad.
This will help direct investment toward domestic-demand sectors
including services, promote industry upgrades, adjust the
economic development model and reduce trade imbalances and the
economy’s overreliance on exports.

Second, it will also help curb inflation and asset bubbles
and strengthen the effectiveness of macroeconomic controls.

Third, it will help maintain strategic opportunities for
China. China is a beneficiary of globalization, so proceeding
with yuan reform will aid the government’s goals of pursuing
mutual benefit, long-term cooperation and common development
with other countries. It will also help maintain strategic
opportunities and an international trade environment favorable
to China.

How to minimize the negative impact of exchange-rate reform?

To further reform the renminbi exchange-rate regime, we
need to minimize the possible negative impact.

First, we need to ensure yuan fluctuations are controllable
and prevent the possibility of market forces causing excessive
adjustment of the renminbi exchange rate. The balance of
payments account is moving closer to equilibrium and increases
in the costs of domestic labor, resources and land are adding to
the price of our nation’s exports. The current yuan rate is not
too far from equilibrium, so there is no basis for substantial
fluctuation.

Second, we have to ensure orderly yuan-rate movements
reflecting China’s economic fundamentals and macroeconomic
policy needs. A floating exchange rate will help improve the
balance of payments, but isn’t targeting bilateral trade
imbalances with particular countries.

Third, adjustments to yuan policy need to reflect the
principle of gradualism. There will be time for companies to
restructure and digest the effects of a floating exchange rate
and for industries to relocate and upgrade, keeping Chinese
companies generally competitive in the global market and guiding
employment toward the service sector.

Fourth, we will strengthen monitoring and management of
short-term speculative capital, preventing large-scale hot-money
flows from shocking China’s financial system.

Is this good time for further yuan reform?

It is a good time for further yuan reform.

First, the recovery and upturn of the Chinese economy has
become more solid with enhanced economic stability, making this
a good moment for yuan reform.

Second, China is accelerating efforts to adjust its
economic structure and growth model, and the global financial
crisis has made this task even more important and pressing. The
reform of the exchange rate mechanism will help promote economic
restructuring and improve the quality and efficiency of growth.

Third, strengthening yuan flexibility and allowing two-way
movement of the currency are also needed to improve the pro-
activeness and effectiveness of China’s macroeconomic policies
dealing with different external shocks.

Why does the yuan rate have to refer to a basket of currencies
rather than a single currency — the dollar?

As China becomes more open to the rest of the world, its
trading partners are becoming more diversified. The trading
volume with the top five trading partners — the EU, U.S., ASEAN,
Japan and Hong Kong — account for 16.3%, 12.9%, 10.1%, 9.4% and
7.5% of China’s total imports and exports respectively for the
first five months this year.

A yuan peg to a single currency can’t meet the need to
diversify currencies used for trade and investment, and also
can’t reflect the real exchange-rate level. A currency basket
can reflect the real exchange-rate level more accurately.
Therefore we must adjust the exchange rate based on market
supply and demand, and move the yuan with reference to a basket
of currencies.

For companies and households in such a diversified trading
and investment environment, it isn’t proper to value the yuan
just based on the U.S. dollar. More attention should be paid to
multilateral exchange rates, rather the bilateral rates, and to
the yuan exchange rate change against the currency basket.

Will any substantial fluctuation occur to yuan?

Large fluctuation in the value of the yuan isn’t in China’s
interest, because it will have a relatively big effect on the
nation’s economic and financial stability. Keeping the yuan
basically stable at a reasonable level is an important part of
further reforming the currency’s exchange rate.

There is no basis at present for large changes in the
yuan’s exchange rate. China’s external trade is steadily
becoming more balanced. The ratio of current-account surplus to
GDP has been declining continuously since 2009, and the balance-
of-payment account is moving closer to equilibrium.

The People’s Bank of China will keep the exchange rate
floating bands the same as previously announced in the interbank
foreign-exchange market and manage and adjust exchange rates
dynamically.

China will steadily push forward other reforms to create a
sound policy environment for the stability of the renminbi
exchange rate.

What are the effects on companies and employment of yuan
movement?

Under the modern international currency system, most major
currencies have adopted floating exchange-rate regimes, so
exporters can’t avoid exchange rate fluctuations.

Since the start of China’s economic reform and opening-up
policies, the market economy has developed to a relatively high
level, and many companies have had the capability and
flexibility to adapt and cope with market changes.

Based on the actual situation between 2005 and 2008 before
the global financial crisis worsened, China’s exports grew 23.4
percent annually. Industries sensitive to exchange rates, such
as textiles and light industry, maintained growth and hadn’t
seen significant losses or business closures. Generally speaking,
exchange rate movements have provided motivation and pressure
for industries to upgrade and for the market to open wider.

The global economy is gradually recovering and the upturn
in the Chinese economy has become more solid, creating a
favorable environment for smooth yuan reform and minimizing the
negative effects. In future, the government will create further
favorable conditions to help companies restructure and the
banking industry will improve financial services to provide
powerful support to businesses and help companies manage
exchange-rate risks.

Further exchange-rate reform will also help create more
jobs, especially jobs in the service sector. Exchange rate
movement will prompt exporters to move from simple processing to
more detailed and refined processing, and by so extending the
production chain, create more jobs.

The exchange-rate will particularly help optimize resource
allocation between tradable sectors and non-tradable sectors,
thus helping reorient employment to move to service industries.
In general, pushing ahead exchange-rate reform has more pros
than cons in terms of the impact on exports and employment.

How to make exchange rate policy work with other policies to
promote economy restructure?

Exchange rates can play an active role in improving the
international balance of payments, boosting domestic demand and
adjusting economic structure.

However, the structural problems that China’s economy faces
can’t be solved simply by the exchange rate, and other policies
are needed to coordinate efforts. China will further adjust
income distribution, boost household income, spur consumer
spending, improve the social safety net and encourage private
investment, especially in the service sector.

China will further improve the resource-pricing mechanism,
promote imports and facilitate overseas investment and
households foreign-exchange use. During the yuan reform process,
China will also strengthen the monitoring and regulation of
capital flows and crack down on illegal foreign-exchange flows.

–Li Yanping and Jessica Zhou in Beijing. Editors: Joshua
Fellman, John Liu

To contact Bloomberg News staff on this story:
Yanping Li in Beijing at +86-10-6649-7568 or
yli16@bloomberg.net