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Central bank specifies currency
basket
BEIJING - Zhou
Xiaochuan, governor of the People's Bank of China
(PBoC), China's central bank, said for the first
time on August 10 that the US dollar, euro,
Japanese yen and South Korean won are the primary
constituents of the basket of currencies that will
act as a reference for the yuan exchange rate.
Zhou made the remark on the occasion of the
central bank's inauguration of its second
headquarters in Shanghai, China's financial hub.
Last month, China abruptly allowed its
currency, the yuan, to appreciate by a modest
2.1%, announcing the yuan will no longer be pegged
to a single currency, the US dollar, following the
rate reform. Instead, the yuan will be adjusted
with reference to a basket of currencies, allowing
the mutual fluctuations of major currencies in the
world market to reduce the yuan's fluctuation.
"The countries and regions and their
currencies that take a comparatively major
position in China's foreign economic activities
concerning foreign trade, foreign debt and foreign
direct investment will be taken into account when
the central bank adjusts the exchange rate of the
Chinese yuan," Zhou said. "They will constitute
the basket of currencies and be weighted
accordingly ... The United States, European Union,
Japan and the Republic of Korea are China's most
important trade partners, so their currencies
naturally [became] the main currencies in the
basket," he said. Singapore, Britain, Malaysia,
Russia, Australia, Thailand and Canada also have
important roles in China's foreign trade, so their
currencies are important for the yuan exchange
rate as well. [Ed: the Hong Kong dollar and New
Taiwan dollar were not mentioned, even though
China holds substantial amounts of both
currencies.]
The yuan exchange rate,
adjusted with reference to a basket of currencies,
better reflects the change of the yuan's value and
China's foreign trade conditions in general, which
will be of great importance for the basic balance
of goods and service trade, he said. Crucially,
Zhou did not reveal the detailed contents of the
currency basket, including the shares
(percentages) of each currency in deciding the
yuan's value. Some experts believe it is wise for
the country not to publicize all the currencies in
the basket as well as their shares, which will
help the central bank better regulate and manage
the exchange rate. [Ed: if the shares of each
currency in the basket were publicly known as well
as their identity, traders could calculate the
yuan's value precisely, which could encourage
speculative activity if the calculated value
differed significantly from the market value. By
keeping the shares secret for the time being, the
PBoC has maintained the existing ambiguity over
the yuan's value, which it evidently considers
desirable.]
Countries with a larger trade
volume with China have a correspondingly larger
share in the basket. The new yuan exchange rate
regime, based on reference to a basket of
currencies, will better cope with the negative
impact brought by the unstable US dollar, and
safeguard the stability of China's foreign trade
environment, he said. Also, the new exchange rate
regime will discourage speculative activities
betting on the yuan's further appreciation, said
Li Yang, director of the Financial Institute of
the Chinese Academy of Social Sciences.
The Chinese yuan had been pegged to the US
dollar at a stable rate of about 8.27 to 1 for
years before the sudden appreciation last month.
With the devaluation of the US dollar in recent
years, the yuan exchange rate against other major
currencies was actually dropping, which some
foreigners claimed was a measure by the Chinese
government to stimulate its soaring exports.
Chinese leaders have said on several occasions
that it is a complicated job to reform the
exchange rate regime, and that this should be done
gradually.
Foreign exchange market
further liberalized
In addition to
revealing the currencies in the yuan basket, the
PBoC has 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 PBoC
notice.
Non-financial institutions and
enterprises that meet the relevant requirements of
the PBoC will now be permitted to enter into the
foreign transaction market, increasing the number
of participants greatly. "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.
Previously, only
a few financial institutions, mainly the Bank of
China, were permitted to trade foreign exchange.
Other institutions, even though they may have
accumulated a large amount of foreign exchange
reserves, were kept out of the door. "Therefore,
the previous mechanism could hardly mirror the
true situation," Wang added. Meanwhile, besides
the existing ways of trading foreign exchange,
such as centralized lending and bidding, a price
query system is also being introduced. "But there
[are] still some differences compared with the
practice in the international market, where [the]
fluctuations of traded currencies are mostly not
bottomed or capped," Wang explained.
The
daily trading price of the US dollar against the
yuan in the inter-bank foreign exchange market
will float within a band of 0.3% around the
central parity value published by the PBoC, while
the trading prices of non-US dollar currencies
against the yuan 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 the PBoC is taking to improve
the yuan exchange rate regime," Zhang Xuechun, an
economist of the Asian Development Bank in
Beijing, told China Daily. "It will help
enterprises and institutions to hedge risks." As
another method to reduce potential risks, PBoC
also loosened restrictions on forward foreign
currency transactions and yuan-to-foreign currency
swaps.
Banks operating in China with licenses
to trade the yuan against foreign currencies on
the inter-bank market, including foreign banks
such as HSBC Holdings Plc, can now 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
Wednesday's statement. "The forwards and swaps of
yuan against foreign currencies allow banks to
offer instruments to clients to help them protect
[themselves] 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
worth US$29.6 trillion 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. "[But] now,
[the] PBoC 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 was the third move in a week to
ease restrictions and further develop foreign
exchange trading in China. The central bank has
followed last month's 2.1% revaluation of the yuan
by relaxing limits on how much foreign currency
companies can hold and increased the amount of
yuan people traveling abroad can sell.
(Asia Pulse/XIC) |
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