China steps up the pace of its effort to liberalise its currency regime, by allowing more currency trading and unveiling the composition of the currency basket for yuan.
It is allowing more financial institutions and companies to trade foreign currencies in the spot market, introducing renminbi forward contracts and swaps into the onshore interbank market, and unveiling for the first time the composition of the currency basket for yuan.
The announcement follows the landmark move by the central bank three weeks ago to scrap the renminbi’s decade-long peg to the US dollar, and is in line with Beijing’s pledge to gradually introduce broader currency reform.
It also coincides with a speech by Zhou Xiaochuan, the central bank governor, who was reported by several news agencies to have revealed more details of the make-up of the currency basket to which the renminbi is referenced after it was de-pegged from the US dollar.
More Currency Trading
Companies whose annual trade volume exceed Rmb2bn (US$247m) will be allowed to buy foreign currencies in the spot market. Insurance companies that have registered capital of more than Rmb1bn, securities firms with capital of more than Rmb500m, and fund management companies with capital of more than Rmb150m.
In the past, such trading was limited to 366 members of the interbank market, mostly banks and credit cooperatives.
The latest move came just a day after the central bank extended the permission to more than 130 domestic and foreign banks to trade renminbi forward contracts, and promised to boost the trade volume on China’s foreign exchange market, which exceeded US$209.9bn last year.
The central bank said the new rules allowing broader use of foreign exchange derivatives were aimed at meeting the need to hedge foreign exchange risk following the July 21 revaluation.
“The timing and conditions are ripe for expanding the forex forwards business and launching the swaps business,” the People’s Bank of China said in a statement.
China began allowing some banks to offer yuan-foreign currency forwards to their clients beginning in 1997 as part of a pilot program. Up to now, only four major state-owned banks and three stockholding commercial banks have participated in the program, the central bank said.
The new rules allow all domestic banks to seek approval for conducting forwards trading. Financial institutions given that approval will be qualified six months later to begin swaps business. The new rules also expand the range of forwards trading allowed.
However, the central bank said swaps of the yuan against foreign currencies couldn’t involve the exchange of interest rates, implying the transactions wouldn’t leave loopholes for trading of interest rate swaps.
Foreign banks also will be allowed to provide the derivative products to their clients.
Yuan Basket Detailed
The US dollar, the Japanese yen, the euro, and the South Korean won are the dominant currencies in the basket, news agencies quoted Mr Zhou as saying in Shanghai.
The basket also includes Singapore dollar, sterling pound, the Malaysian ringgit, the Russian rouble, the Australian dollar, the Thai baht and the Canadian dollar, the reports said.
The measures unveiled Wednesday are aimed at “making the market play a bigger role in the formation of the foreign exchange rate and providing more tools for banks and companies to hedge currency risks,” the People’s Bank of China, the central bank, said in a statement posted on its website.