The People's Bank of China (PBC), the nation's central bank, further boosted the development of the inter-bank foreign exchange market by expanding the scope of transaction participants, diversifying the ways of trading and increasing product choices, a move to improve the currency exchange rate adjustment mechanism, said a PBC notice.

Non-financial institutions and enterprises that meet the relevant requirements of PBC can enter into the foreign transaction market, largely increasing the number of participants.

"This regulation will better reflect the de facto demand and supply in the foreign exchange market," Wang Yuanhong, a senior economist at the State Information Centre (SIC), told China Daily.

As before, only few financial institutions, mainly the Bank of China, can trade foreign exchange. Other institutions, even though they have a large amount of foreign exchange reserves, are kept out of the door. "Therefore, the previous mechanism can hardly mirror the true situation," Wang added.

Meanwhile, besides the existing ways of dealing, such as centralized lending and bidding, a price query system is also being introduced.

"But there is still some difference compared with the practice in the international market where fluctuation of trading currencies are mostly not bottomed or capped," Wang explained.

The daily trading price of the US dollar against the renminbi in the inter-bank foreign exchange market will float within a band of 0.3 percent around the central parity published by PBC, while the trading prices of the non-US dollar currencies against the renminbi will be allowed to move within a certain band announced by the central bank.

"The introduction of a price query system is one of the series of measures PBC is taking to improve the renminbi exchange rate regime," Zhang Xuechun, an economist of the Asian Development Bank (Beijing reprensantative), told China Daily. "It will help enterprises and institutions to hedge risks."

As another method to reduce potential risks, PBC also loosened the restriction on forward foreign transactions and yuan to other currencies swaps.

Banks operating in China with licences to trade the yuan against foreign currencies on the inter-bank market, including foreign banks such as HSBC Holdings Plc, can apply to the State Administration of Foreign Exchange for permission to trade yuan forwards and yuan swaps.

The Bank of China, the nation's largest foreign currency trader, was allowed to trade yuan forwards in a pilot program in 1997. The program was extended to include all four of China's biggest State-owned lenders and three commercial banks in 2004 and is now open to most banks in the country.

"Chinese companies require better, and more, products and services to hedge against currency risks," the central bank said in yesterday's statement. "The forwards and swaps of yuan against foreign currencies allow banks to offer instruments to clients to help them protect against currency swings. And now the time is ripe to offer these two products."

Non-deliverable forwards are already traded over-the-counter outside China.

They are non-deliverable because there are limits on how much money can be taken in and out China. Investors worldwide held currency derivatives based on US$29.6 trillion of assets at the end of 2004, according to the Bank for International Settlements.

"The central bank allowed a forward market in currency for quite a few years, but the volume of transactions has been quite small," said an analyst, who declined to be named. "And now, PBC is recognizing that the demand for this kind of transaction will take off, and it has to increase the number of institutions that provide this service."

The central bank's newly released notice is the third move in a week to ease restrictions and develop foreign exchange trading in China.

The central bank has followed last month's 2.1 percent revaluation by relaxing limits on how much foreign currency companies can hold and increased the amount of yuan people travelling abroad can sell.

(China Daily August 11, 2005)