China vows to make yuan more responsive to market

BEIJING, Apr 17 (Reuters) China will push reforms to make the yuan more responsive to market forces as part of efforts to rebalance the economy, the head of the State Administration of Foreign Exchange said in remarks published on Monday.

China's swelling balance of payments surplus in recent years had made it harder for the central bank to control money supply, Hu Xiaolian said in an article published in the latest edition of Qiushi magazine, a Communist Party mouthpiece.

''We will further improve the yuan exchange rate formation mechanism and constantly make the exchange rate more responsive to market supply and demand,'' said Hu, who is also a deputy governor at the central bank.

Hu said the key areas earmarked for reform would include allowing more firms to trade on the foreign exchange market and taking steps to spur market liquidity and develop more products for hedging risk.

She also reaffirmed the government's long-standing policy of keeping the yuan ''basically stable at a rational and balanced level''.

On Friday, China relaxed its capital controls to make it much easier for individuals and firms to buy foreign currencies and invest abroad, a step towards a market-driven exchange rate.

Hu said the government would boost imports of advanced equipment, petroleum and iron ore and deepen interest rate reforms. It would also reform the pricing systems for land, energy, electricity and transport to reduce ''distortions'' caused by low prices.

China's swelling balance of payments surplus reflected a high savings rate, as ordinary residents remained reluctant to spend amid uncertainties associated with the lack of social safety nets, medical care and higher educational costs, she said.

China's foreign exchange reserves, the world's largest, rose to 5.1 billion at the end of March, fuelled by foreign direct investment in the first three months of 2006 of .25 billion and a first-quarter trade surplus of billion.

The central bank buys dollars to ensure the yuan does not rise too sharply, but it has to sterilise huge yuan liquidity subsequently released to the banking system to rein in money supply.

REUTERS PV HT1622