China will maintain the current foreign-exchange system but will allow the market to play an increasingly larger role in determining the renminbi's rate, according to the nation's foreign-exchange chief.

To that end, the foreign-exchange market will become more sophisticated as a platform determining the renminbi's exchange rate, Guo Shuqing, director of the State Administration of Foreign Exchange (SAFE), told China Daily in a written interview.

"The interbank foreign exchange market is the platform which determines the renminbi's rate...to improve the function of the market is an important part of the foreign exchange system's reform," he said.

Guo said more instruments will be introduced for trading this year; and SAFE would also consider permitting instruments that enterprises can use to hedge risks in the foreign exchange market.

Other financial officials said a market-maker system might be experimented to ensure vibrant trading. Market makers, which are designated by financial authorities, are institutions that buy and sell currencies on a regular and continuous basis at a publicly-quoted price.

The renminbi currently trades in a narrow band against the greenback.

Guo and other senior economic officials have said the yuan's exchange rate will be allowed increasing flexibility as the country reforms its exchange-rate system.

"The reform will be a complex, gradual process. It must be pushed forward in a steady manner," Guo said.

Meanwhile, capital injection and bringing in strategic investors are among options for China's financial authorities in their attempt to recapitalize the Industrial and Commercial Bank of China (ICBC), he said at the sidelines of the National Committee of the CPPCC meeting yesterday.

Guo, who is a CPPCC member, said using part of the country's hefty foreign exchange reserves to fund an ICBC capital infusion would be an "appropriate method."

In late 2003, the country injected a total US$45 billion into the Bank of China (BOC) and China Construction Bank (CCB) to help boost their balance sheets following a massive debt write-off.

Analysts said it is very likely the country would also use foreign exchange reserves to recapitalize ICBC.

However, other methods such as issuing bonds, as was done in 1998, are also possible options.

ICBC, BOC, CCB are among the four major State banks, the other being Agricultural Bank of China (ABC). BOC and CCB are preparing for a listing while ICBC also plans to go public.

A holding company named Central Huijin Corp was established to allow capital infusion into BOC and CCB.

The company reports directly to the State Council instead of the Ministry of Finance or the People's Bank of China, said Guo, who is also a vice-governor of the central bank.

Guo said the effects of the capital injection were basically positive, and financial authorities were studying the results to draw lessons for the reform of ICBC and ABC.

Guo also said the financial authorities are considering allowing more renminbi-based transactions in Hong Kong; and are evaluating the feasibility of allowing the issue of yuan-denominated bonds and corporate loans in the territory.

(China Daily March 7, 2005)