and fdi in china, and the speculative factors are also unlikely to leave right away. under the managed floating exchange rate regime, the pbc will gradually reduce its managing role in the foreign exchange market in line with the situation, which will lead to a slower growth of the foreign reserves. 25. after the asian financial crisis, there emerged some new views and discussions with regard to setting a higher level as the rational foreign exchange reserve holding. these developments are also related to the severe shocks experienced and lessons learned by the crisis hit countries. 26. if two comparable countries have different sizes of external debts and different stocks of fdi, their foreign reserves should not be held at the same level. external debts need to be repaid, and fdi entails dividend remittances and they may even withdraw. besides, some speculative hot money, if existed, could also seize the opportunity to exit at any time. all these factors bear some influences on the quantitative level of foreign reserve holding. if measured by per capita level, china ’ s foreign reserves are not high. wto rules 27. the wto mechanism has established game rules on a multilateral basis that enable all members to win ; it is also a win - win game for china and the us. although members may dispute regarding some imbalances, it at least gives a room for the differences to be resolved through negotiations. if anybody designs a lose - lose game for us and china, it hurts both countries, and designer himself will be in a dilemma whether the game should go on or not. thus we have to choose and play a win - win game of free trade and anti - protectionism.

of the rmb exchange rate regime on july 21, 2005, which has won objective and positive responses from the international community. 7. the policy analysis and forecasts conducted before the reform has produced different views about the reform impact, therefore, we need some time to observe and collect data to assess and confirm the impact of the exchange rate reform on the domestic economy and employment etc. 8. six months after the reform, most of the chinese enterprises have adapted smoothly to the reform after undertaking painful restructuring, however a few sectors suffered severely from the exchange rate adjustment. on such a count, we may conclude that the market force could be allowed gradually to play a greater role in the floating exchange rate. 9. over the past eight months, great efforts have been made by china to cultivate and develop foreign exchange markets. trading products were enriched in the market, risk hedging instruments like forward and swap were developed, market makers and otc transactions were introduced in the interbank foreign exchange market. the chinese enterprises and financial institutions need some time to learn and adapt to the changes in foreign exchange market, so that they could be in a better position to keep in line with the flotation of exchange rate. 10. over the past eight months, china has decontrolled some unnecessary foreign exchange restrictions. actions taken in this respect included relaxation of controls imposed on foreign exchange retained and use of foreign exchange under capital account by the enterprises, facilitation of foreign exchange use by individuals under current account, and the exercise of applying comprehensive management of foreign exchange positions held by the banks. through these efforts, the foreign exchange market will more objectively reflect the relationship between supply and demand of foreign exchange. gradualist approach or shock therapy? 11. due to the accelerating development of globalization, cross - border outsourcing and adjustment of supply chains as mentioned before, it is likely that it will take several years before the global trade could reach a new equilibrium. china as a large developing economy with heavy employment pressures and a still fragile financial system, could only adopt a gradualist approach to adjust its economy in a controllable manner. 12. the imf has recently held a conference to discuss the global imbalances, and most of the participants believed that it was appropriate to pursue a gradual adjustment, and radical measures could result in unanticipated consequences. besides, some participants suggested that the us has been too slow in making an internal adjustment. 13. some advisors have prescribed the “