China has approved its first batch of market makers for the
trading of renminbi as part of further steps to make the exchange
rate mechanism market-driven.
Citigroup Inc and Standard Chartered Plc are among those
receiving approval by the State Administration of Foreign Exchange
(SAFE), China's foreign exchange regulator, Bloomberg News
reported on Friday.
China's four State-owned commercial banks are in the initial
batch, sources said. Market-makers may be able to quote and trade
the yuan against the dollar, euro and yen.
A SAFE spokesman declined to comment on the news.
Senior SAFE officials said earlier this year that they hoped
market makers for trading between the local currency and the US
dollar would be launched before the end of this year to help make
the renminbi exchange rate forming mechanism more
market-driven.
"Now market mechanisms will play a bigger role in forming the
renminbi exchange rate," said a trader with one of the four
State-owned banks. "With more banks providing liquidity, trading
will become more active and there will likely be great price
fluctuations."
China reformed its decade-old exchange rate policy on July 21,
allowing the yuan to appreciate by 2 percent against the US dollar
and linking the currency to a basket of foreign currencies instead
of the US dollar alone.
Expectations for further appreciation of renminbi remain in the
marketplace, as trading partners continued to push for a stronger
yuan and complained about narrower-than-expected price
fluctuations.
The introduction of market makers in transactions between
renminbi and foreign currencies will likely broaden the
fluctuations, but "it will only be seen after the system has worked
for some time," the trader said.
China's four State-owned commercial banks, such as the Hong
Kong-listed China Construction Bank (CCB), are
still the biggest traders of yuan in the market after the People's
Bank of China (PBC),
the central bank.
But foreign banks will play a bigger role in the future. "It
will enable us to fully participate in the development of the
foreign exchange market, while providing more flexibility for our
clients," Richard Stanley, Citigroup's China chief executive
officer, said in a statement. "We believe this is another important
step for the advancement of China's currency market."
The introduction of more market makers, which are expected to
provide liquidity by quoting both selling and buying prices, will
also help reduce the burden on the central bank to absorb excess
dollars in the market.
The PBC enforces the trading band of renminbi by buying the
excess dollars in the market with local currency. Its purchases of
dollars are added to a growing stockpile of foreign exchange
reserves, while the local money it uses injects new liquidity into
the banking system.
With China's foreign trade continuing to see huge surpluses and
expectations for a renminbi appreciation remaining strong, heavy
inflows of dollars have fuelled the growth of local money supply to
unhelpfully fast rates.
(China Daily December 31, 2005)
