Market Mechanism is Working and Economic Disequilibrium is Shrinking
Vice Governor, People's Bank of China
It is not conflicting for RMB to appreciate internationally and at the same time depreciate internally. They are two channels that can realize economic equilibrium. RMB appreciation makes import goods cheaper. If this is taken into consideration, RMB's weighted purchasing power does not fall at least. In addition, RMB appreciation is the most efficient way to encourages the allocation of resource to domestic demand.
Recently U.S. subprime crisis has deteriorated by far and Sourthern China experienced rarely cold weather. Should the tight monetary policy set at the end of 2007 be adjusted in response to the two events? I don't think so. Inflation is still the foremost danger of Chinese economy.
For the past two years, the structure of China's financial asset has undergone dramatic changes. The proportions of stock and mutual fund have hiked, and the share of direct financing has increased considerably. Such a rapid development has been desired for a long time. Now it is fulfilled with the function of price and market.
Enormous capital is flowing into emerging market. In order to tackle with capital inflow, capital control is one of the proposed measures. However, the experiences of Chile, Columbia, Brazil and Thailand demonstrate that capital control may work temporarily but will be offset in later by more capital inflow through uncontrolled channels. If complete capital control is implemented, the costs will be unbearable especially for an open economy like China. In fact, appropriate interest rate, exchange rate and macroeconomic policies are of importance.