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 “

prudential policy. i would first talk about what risks we should guard against. here are several examples. one of the manifestations of major risks is abnormal market fluctuation and external shocks, for instance, the marked ups and downs in the stock market or the bond market, or market panics 8 / 15 bis central bankers'speeches resulting from corporate defaults. default means that an enterprise can ’ t repay the principal and interest of its debt when time is due, which would cause panics. external shocks may destabilize market expectations. at present, the pivot interest rate of money market stands at 2. 6 % with the interest rate of excess reserves at 0. 72 % as the floor and the slf interest rate at 3. 55 % as the ceiling. the range of this interest rate corridor is relatively narrow. why do we say it is not easy to keep the interest rate within a narrow range? for example, when the asian financial crisis hit hong kong in 1998, the interest rates in hk could be as high as 300 % plus. just now i mentioned that the money market rate stands at around 2. 6 %, the ceiling is over 3 % and the floor is 0. 72 %. external shocks may drive the interest rate up to 10 %, 20 %, or even several hundred percent. it shows that if stricken by expectation or external shocks, the money market will probably suffer from great fluctuations, so we need to consider preventing risk contagion among different markets when making policies. the second manifestation of risks is credit risks. what are credit risks? for commercial banks, loans become non - performing assets if they cannot be serviced, which constitutes banks ’ credit risk. for companies, if they default on bonds issued, the credit risk will emerge. credit risks should be taken into consideration when thinking about the monetary policy and financial stability. at present, the overall non - performing loan ratio of commercial banks is 1. 87 %, lower than 2 %. in regards to the bond market, we should think about how many defaults there have been this year, what the volume involved is, what the default rate is, and how much the overall credit default risk impacts the market. the third risk is the so - called shadow banking risk. shadow banking refers to bank - like businesses such as asset management business, inter - bank business and asset securitization operated by banks and other financial institutions including trust companies, asset management companies and insurance companies.