- finished goods to meet domestic demand. in the case of production factor price adjustment, higher labour and resources price and environmental protection cost will affect the corporate sector as a whole. although enterprises are able to reduce the burden through technical innovation and higher resource utilization efficiency, the overall impact of such adjustment will be extensive and transmitted through a longer chain. fifth, the two reforms have different impacts on inflation. production factor price adjustment will directly increase inflation pressure. if the rmb exchange rate appreciates in response to market demand and supply, that will directly reduce the domestic currency denominated price of imported goods, and reduce inflation pressure through changes towards a more balanced bop account and the subsequent reduction of passive base money supply. 5. the production factor price adjustment and exchange rate regime reform can work together to achieve the intended outcome. on the one hand, a more flexible rmb exchange rate will create a low - inflation environment for the reform of production factor price, and will not stand in the way of such reform. past experience has shown that the major consideration of production factor price adjustment is the concern for its impact on inflation and income distribution. for example, gasoline surcharge to tax reform has been in deliberation for more than a decade, and much debate is on the necessary conditions, timing, and distribution effect of such reform. the major concern is whether the price reform of production factor will cause inflation and have a big impact on income distribution. exchange rate reform can mitigate the impact and promote production factor price reform. moreover, when formulating the inflation range for monetary operations, consideration has been given to such reform. on the other hand, the adjustment of production factor prices helps alter the cost - ineffective pattern of economic and trade growth both directly and indirectly. such adjustment promotes the upgrade of export - oriented industries and makes enterprises more adaptive and resilient to volatility of market prices. it also helps ease the expectation of rmb appreciation, reduce short - term capital inflows, lessen pressures from the international community and thus provides a facilitating environment for further reform of rmb exchange rate regime. therefore, the reform of exchange rate regime and adjustment of production factor prices complement rather than working against each other. effective coordination of the two policy tools is essential to stable macroeconomic development. to sum up, adjustment of production factor prices and further reform of exchange rate regime both contribute to realize the goals for macroeconomic management, as they help optimize resource allocation, incentivize enterprises

hu xiaolian : the cooperative relation between adjustment of production factor price and reform of the exchange rate regime article by ms hu xiaolian, deputy governor of the people ’ s bank of china, beijing, 30 july 2010. * * * china faces a major challenge and the task of restructuring the economy and achieving sustainable and balanced growth. to realize these goals and to transform the growth pattern, the chinese government has taken a series of decisive measures, especially in the field of the price reform of production factors, energy saving and emission reduction, e. g. promoting the resource tax and fee reform, increasing the cost of polluting the environment, raising the minimum wage of enterprise employees, and etc. the price of labor, resource and energy and environment cost are generally on the rise. in this context, further reform of the rmb exchange rate regime requires in - depth analysis on the relation between factor price adjustment and the reform of rmb exchange rate regime. 1. it is necessary to adjust production factor prices as the economy develops. the benefits brought by economic development should be shared by the whole society and lead to higher wages. significant demographic change is underway in china. in the first decade of the 21st century, the growth of working - age population moderated compared with the last two decades of the 20th century. total working - age population may even decline in the next 5 to 10 years. with such a demographic change and continued and massive migration of surplus rural labor into the urban area, the chinese economy is approaching the lewis turning point, where labor surplus is expected to drain off and pressures for pay rise will mount. for years, wages for unskilled workers of export - oriented processing enterprises rose quite slowly, but migrant worker shortage frequently seen in recent years points to the fact that the wage for workers, especially that of the migrant workers, can no longer remain as low as previously was. moreover, the foxconn incident has drawn increased attention to the issue of low - income workers, pressing for substantial rise of minimum wages in many areas. in the meantime, as the economy grows in size and consumes more energy and resources, bottlenecks will become more acute. with urbanization and industrialization rapidly progressing, the fast growing chinese economy consumes massive amount of energy and resources and faces mounting pressures to protect the environment and address climate change. it is a general global trend that prices for non - renewable energy and resources and environment cost will be on a rise. from 2003 to 2009, the purchasing