zhou xiaochuan : rules for developing a financial center and the reform of the rmb exchange rate regime speech by mr zhou xiaochuan governor of the people ’ s bank of china, at the inauguration ceremony of the people ’ s bank of china shanghai head office, shanghai, 10 august 2005. * * * honorable general secretary chen, honorable mayor han, colleagues and friends from the financial industry dear guests, and ladies and gentlemen, first of all, i would like to take this opportunity to express my gratitude to all the concern and support you have kindly rendered to the people ’ s bank of china over so many years, and i would also like to thank you for availing yourself from your busy schedule to attend the inauguration ceremony of the people ’ s bank of china shanghai head office. on today ’ s significant occasion, i wish to focus my remarks on two specific issues. the first issue explores the rules for developing a financial center, and the second issue aims to clarify questions concerning the reform of the rmb exchange rate regime. for the first issue, the answer is quite straightforward. the people ’ s bank of china shanghai head office is established for the purpose of strengthening functions of the central bank head office related to improving financial market operations and financial services. first, both international experiences and the chinese practices in the process of reform and opening up have well demonstrated that greater marketization of the economy could lead to increased crossregion economic activities, and consequently an improved integration and scale of the economy which calls for strengthening of the functions of the central bank head office in terms of market operation and provision of financial services. marketization and internationalization expose economic development undergo constant changes, leading to increased reliance of monetary policy conduct and transmission on the money market and foreign exchange market. the development of the financial market itself will also help to expand financial services to clients in different regions of the country and to cultivate a limited number of financial markets serving the whole nation and even the world, not segmented financial markets dotted across the country serving different regions. for the time being, shanghai has already become the harbor for some financial markets with national influence, such as the foreign exchange market, the gold market, securities market, futures market and the inter - bank bond market etc. however in the past when the centralized economic system was prevalent or in the early periods of reform when marketization was barely developed, financial organizations favored an institutional structure featuring “ parallel set - up of business departments at the subordinate and head office level ” which

has been witnessed in fdi which has been gaining importance in our foreign economic relations. by now, the accumulated fdi flowed into china has reached over us $ 560 billion, a significant part of which was denominated in the currencies of the originating economies. the investment returns in the form of dividends will need to be exchanged into relevant foreign currency before being repatriated. therefore the factor of fdi has to be considered in the selection of the basket currencies. - current transfer items under the current account should also be considered though current transfers are not as important proportionally as other items in the current account, the currency structure of these transfers still needs to be considered in the determination of the weights assigned to the currencies in the basket. in sum, the reform of rmb exchange rate regime to allow rmb exchange rate float with reference to a basket of currencies is in line with the needs of diversifying foreign economic and trade relations as well as the development of the international economic and financial system. referring to a basket of currencies is not equal to pegging to such a basket. pegging means mechanically adjusting the exchange rate of rmb against the us dollar according to the exchange rate movements of the currencies in the basket in an attempt to keep the nominal effective exchange rate unchanged. quite differently, what we are having now is a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. in comparison with an exchange rate regime of pegging to the us dollar solely, it can better reflect the competitiveness of rmb against major currencies, better absorb the impact generated by an unstable us dollar and moderate the fluctuations of rmb exchange rates at the multilateral level, safeguard the overall stability of china ’ s foreign economic and trade environment and consequently promote the basic equilibrium of balance of payments as well as the sustained, coordinated and healthy growth of the chinese economy. thank you very much.