BEIJING, March 19: A system of foreign currency trading that China is planning to start this year could become the prototype for more flexible dealing in the country’s own currency, the yuan, state media and officials said on Friday. The system, with which China will dip a toe into free-market currency trading, will be based on market-making banks operating within a members-only dealing system. Chinese banks currently have little experience in trading floating-rate currencies. The China Foreign Exchange Trade System, the interbank forex market, deals in only four overseas currencies and all are traded only against the yuan, which the central bank keeps narrowly pegged to the dollar. But in May the market will open trading of eight foreign currency pairs, an unprecedent step that analysts say could help the country refine its forex system ahead of any move to liberalise the yuan. Bank of China, CITIC Industrial Bank and seven foreign banks, including HSBC Holdings Plc., Deutsche Bank A.G. and Citibank, will be market makers — members obliged to offer buying and selling prices at all times, so other players can always find someone to trade with. That should boost volumes and liquidity. “The moves will pave the way for the launch of a market-maker system for trading between the renminbi and the US dollar, which the local currency is pegged to,” the China Daily said.
“The market maker system for the foreign currencies will help China accumulate experience,” the newspaper said.
An official at the Shanghai-based forex market said the State Administration of Foreign Exchange, the forex regulator, was studying plans to introduce market makers in trading between the yuan and dollar. But she declined to give further details.
It is unclear which banks would eventually be picked as dollar-yuan market makers, but Chinese media have said the Big Four local banks — Bank of China, China Construction Bank, Industrial and Commercial Bank and Agricultural Bank of China — might be candidates.
The eight currency pairs to be launched are the US dollar against the euro, yen, Hong Kong dollar, sterling, Swiss franc, the Australian dollar and the Canadian dollar, plus the euro versus the yen.
China’s decade-old interbank foreign exchange market now trades just four currency pairs: the Chinese yuan against the euro, yen, the Hong Kong dollar and US dollar.
China has come under pressure from the United States to make its currency more flexible. The yuan has been pegged at about 8.28 per dollar since the 1997/98 Asian financial crisis and critics say that makes its exports artificially cheap.
While resisting foreign pressure to revalue the yuan, Chinese leaders have pledged to make it more flexible by reforming the exchange rate regime over time. No timetable has been given.
Analysts said the new currency trading, helped by news and information provider Reuters Group Plc., would have limited direct impact on the yuan, but would highlight Beijing’s step-by-step approach in pushing currency reforms.
The government has a clear goal of moving towards a floating exchange rate, and all the measures — building a market infrastructure and relaxing capital control — are aimed at laying a foundation for making the yuan more market driven, said Gao Shanwen, economist at Everbright Securities in Shanghai.—Reuters
