At the Shanghai-based China Foreign Exchange Swap Center on Wednesday morning, the Bank of China and Fujian Industrial Bank completed the Center's first trading session between the US and HK dollars, at 7.7993 HK dollars against one US dollar, with a turnover of one million US dollars.

This transaction as between foreign currencies is a first on the Chinese mainland and is seen by China's financial circle as a milestone in the sector's internationalization drive. It is also hailed by the business media as a step towards a potential full convertibility of the renminbi (RMB), the Chinese currency.

In the past, Chinese banking institutions were only allowed to deal in trades between RMB and foreign currencies. In addition, they were unable to buy and sell foreign currencies directly on international money markets with foreign exchange they held, due largely to their low credit ratings and high risks of exposure.

The newly acquired access to two-way trade among foreign currencies implies that China's interbank market is evolving into a foreign exchange market that has the capabilities to transfer and manage risks in exchange rates, according to financial experts.

Zheng Yang, deputy head of the State Administration of Foreign Exchange (SAFE) Shanghai branch, said China has suffered a deficit in trade of financial services for years. "To trade foreign currencies directly allows international trade between Chinese and foreign banks to transform into domestic trade," Zheng Yang acknowledged.

According to Li Yu, vice president of the China Foreign Exchange Swap Center, the new forex market will also experiment with RMB derivatives.

"The step forward in the RMB convertibility process and the growth of the liberalization and internationalization of Chinese currency is bound to demand a corresponding RMB pricing platform that is closely related to international forex markets," Li said.

The new trade between foreign currencies has introduced international best practices, active international market movers and shakers, and a pricing system that keeps pace with the global forex market, he added.

This development has so far attracted seven international banks including Citi Group and HSBC (Hong Kong and Shanghai Banking Corp.). They, in partnership with three Chinese banks, have become the first batch of market makers on the China forex swap market.

"The eight pairs of foreign currencies trading on the Chinese mainland boast good liquidity. This will help China's interbank forex market to build up a trustworthy image in world markets," said Rod Jones, executive managing director of the International Capital Markets, Bank of Montreal, Canada.

Jay Lim, vice president of eCommerce Asia Pacific Global Markets at ABN AMRO, said the new forex trading mode "is writing the history of China's financial market."

(Xinhua News Agency May 20, 2005)