Chinese Premier Wen Jiabao said Monday the nation will improve the mechanism for setting the RMB exchange rate and seek ways to use the massive state foreign exchange reserves appropriately.

Wen made the statement while delivering a government work report at the opening of the Fifth Session of the Tenth National People's Congress, the top legislature.

The RMB value has risen more than 6 percent since July 21, 2005, when the Chinese government launched the reform of the exchange rate system to allow the yuan to float against the U.S. dollar within a daily band of 0.3 percent around the official central parity rate.

The central parity of RMB against the U.S. dollar was 7.7403 yuan per U.S. dollar on March 5, compared with the rate of 8.28 yuan before the reform.

"We will improve the mechanism for setting the RMB exchange rate, strengthen and improve foreign exchange administration," Wen said.

RMB exchange rate might appreciate by 5 percent in 2007, according to a Xinhua Economic Analysis Report, a regular product by a team of more than 80 economic analysts working with Xinhua Economic Information Department, released at the beginning of this year.

The report held that the short-term RMB exchange rate will be influenced by the fluctuation between the dollar and other currencies, but in the long run, it depends on the progress of China's exchange rate reforms. Stable appreciation in small steps is generally expected.

The foreign exchange policy is in line with the pace of China's economic development and the daily floating band is enough to allow sufficient appreciation of the RMB, said well-known Chinese economist Fan Gang.

The major problem in the world capital market is the excessive amount of the U.S. dollar, which has led to its devaluation. RMB appreciation not only helps strike market speculation, but is also beneficial to maintaining a stable economy, according to Fan.

Lin Yifu, a noted economist and political advisor, said China should combat speculation over RMB appreciation by controlling the pace of the currency's rise in value, according to a China Daily report on Monday.

If the currency is allowed to appreciate, the exchange rate's annual change should be less than 3 percent, Lin said.

The Chinese premier also said China will "actively explore and develop channels and means for appropriately using state foreign exchange reserves."

Foreign exchange reserves reached 1.066 trillion U.S. dollars at the end of 2006, up from 212.2 billion dollars at the end of 2001, according to the People's Bank of China, the central bank.

China is seeking more channels to ease the pressure generated by rising foreign exchange reserves, allowing businesses to keep a larger share of their foreign exchange income and encouraging financial investment abroad in the form of qualified domestic institutional investors (QDII).

Contrary to its past policies, China has implemented stricter regulations on incoming foreign exchange and loosened rigid controls on outgoing reserves, said Huang Zemin, head of the International Finance Institute of East China Normal University.

The State Administration of Foreign Exchange granted 15 banks overseas investment quotas totaling 13.4 billion U.S. dollars in 2006. Meanwhile, 15 insurance companies were granted quotas totaling 5.17 billion U.S. dollars and one fund management company was given a quota of 500 million U.S. dollars.

The United States has blamed its colossal trade deficit on what it claims is a seriously undervalued RMB and has been pressing China to allow for a bigger revaluation.

However, an appreciating RMB will not change the trade pattern between China and other countries, said Xie Fuzhan, head of the National Bureau of Statistics.

Xie said the RMB has appreciated gradually against the U.S. dollar since China launched the foreign exchange rate reform, but China's trade surplus with the United States has not decreased.

Moreover, China still has a trade deficit with neighboring countries including Japan, the Republic of Korea and the ASEAN ( Association of Southeast Asian Nations) countries.

China will continue to uphold the principles of "independent initiative, controllability and gradual process" in pursuing RMB exchange rate reform, said Xie.

The principles, set out at the beginning of the reform, indicate that China will independently determine the content and timing of reforms in line with its needs, take account of possible impact on the country's economy and push forward the reform in a step-by-step manner, Xie said.

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