His answer, "I personally feel there is some pressure for the yuan to appreciate..." did not surprise many people. Japan and some European countries have been calling for China to revalue the yuan, with Japan even blaming the "under-valuation" of the RMB for prolonging its economic woes.

China's strong economic performance, they argue, shows that the yuan is under-valued. Foreign exchange reserves in China soared 35 per cent last year to reach US$286.4 billion. Its trade surplus for the entire year grew to US$30.3 billion, up from US$22.6 billion in 2001. Foreign direct investment reached US$52.7 billion. These numbers seem to indicate that there is pressure on the renminbi to rise, which has remained basically stagnant for the last six years when it appreciated by 5 per cent against the US dollar between 1994 and 1997.

China's foreign exchange reserves are strictly controlled by the Central Bank, and while the RMB appears to be a managed float, it is actually fixed at 8.27 to the US dollar.

Tight controls on the exchange of the renminbi lessen its export earnings, keep the cost of imports high, and increase the country's dependence on foreign trade and investment. A stronger RMB, on the other had, would probably apply the breaks to China's soaring exports, make imports more affordable, and reduce foreign investment -- all of which would make the economy contract and unemployment rise.

Finding jobs for China's estimated 300 million migrant farmers who have been drawn to urban areas in the hope of finding work is one of the biggest challenges that the government is currently grappling with. Any unrest among the army of the unemployed could destabilise the country and with it its economy. Little wonder then that the new Governor of the People's Bank of China, Zhou Xiaochuan, reiterated in January that China's existing currency regime would remain intact. But he also said that while maintaining a stable RMB, the government would work on perfecting its current exchange rate mechanism.

The renminbi capital account is not fully convertible now. Companies in China are currently required to inform the authorities when they want to exchange renminbi for US dollars, and are bound by strict regulations. The idea is to ease these restrictions to enable businesses to play a role in determining an exchange rate based on market forces. To do this, it would most likely need to widen the renminbi's floating range to 2 or 3 per cent. Although such a move is unlikely to be implemented soon, it is expected to give businesses in the country more flexibility.

The government is also looking at ways to ease pressure on revaluing the yuan. Rather than raising the value of the yuan to lessen its trade deficit, China is pumping more of its foreign exchange reserves into investments abroad now that restrictions on Mainland enterprises investing overseas have been eased.

This year, the State Administration of Foreign Exchange has allowed a number of enterprises in Guangdong, Zhejiang and Shanghai to convert renminbi into foreign currency to pay for their overseas investments. It plans to phase in this initiative in other areas as long as it does not create a flood of illegal capital flowing out of the country.

As a financial services hub, Hong Kong is in a privileged position to capitalise on this outflow of funds, and may even attract businesses to invest here, especially companies that are concerned about protecting their intellectual property rights.

Foreign direct investment is also causing China's foreign exchange vaults to overflow. Consequently, the government is starting to gradually cut back on preferential treatment packages offered to foreign enterprises, an issue that Hong Kong businesses should be aware of.

China's official media have stressed on countless occasions that the country needs to accelerate the provision of "national treatment" for foreign enterprises in a bid to create a fair playing field for domestic and foreign enterprises once China's WTO commitments are implemented. It is purportedly considering scrapping the "two-year tax concession and three-year tax exemption" policy which will be replaced by a uniform tax system for domestic and foreign enterprises.

Just what affect this will have on foreign investment is difficult to gauge. But Minister Xiang, while saying there is "some pressure" for the yuan to appreciate, said in February that he sees "no need" to revalue the yuan.

In an interview with Finland's Helsingin Sanomat paper, he was quoted as saying, "When it comes to whether the renminbi is influencing the U.S. and Japanese economies, the renminbi's influence is perhaps overvalued.

"Naturally our foreign friends can think that the renminbi's value should be corrected. We don't see any need that the renminbi's value should be raised. We think that it is to all countries' advantage that the renminbi is stable."