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August 10, 2005

Another Step Forward For China

The Financial Times reports this morning that the Chinese government is continuing on its path of financial market liberalization (as it said it would):

China stepped up the pace of its effort to liberalise its currency regime, allowing more financial institutions and companies to trade foreign currencies in the spot market and introducing renminbi forward contracts and swaps into the onshore interbank market.

Here are a few details, from China Daily:

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.

At the same time, the Chinese central bank has provided some insight into the basket of currencies that will inform its exchange rate decisions.

China disclosed for the first time Wednesday the composition of the basket of currencies used to set the yuan's value, saying it mainly includes the U.S. dollar, euro, yen and Korean won, the Associated Press reported.

The currencies of Singapore, Britain, Malaysia, Russia, Australia, Canada and Thailand are also considered in setting the yuan's foreign exchange rate, Zhou Xiaochuan, the central bank governor, said during a speech to launch a new operations center for the People's Bank of China in Shanghai.

Well, Ok, that's as far as it goes...

The news dispels at least some of the mystery surrounding the yuan's new exchange rate, although there was no information about the weightings of each currency.

... but it's more than we knew yesterday, even if pretty much what we all expected. There was, as you might have come to expect, an intriguing note in the collection of announcements:

While widening currency trading onshore, the bank said it would strengthen its oversight and management of the market "to guarantee stable, orderly market operations and maintain the basic stability of the yuan exchange rate at a reasonable, balanced level."

Not sure exactly what that means, but I'm sticking with my judgment that this is a positive development that only enhances the likelihood of an orderly transition toward further yuan revaluations.

August 10, 2005 in Asia , Exchange Rates and the Dollar | Permalink


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» china economic roundup (iii) from asiapundit
At China Era, the last chapter in a six-part essay The Rise of a New Power:For all its talk about market magic, China's overpopulated state sector is a massive job bank compared with western governments, which leaves some of the [Read More]

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» Yuan and Chinese financial market reforms from Simon World
China has announced the composite currencies in its new reference basket in managing the yuan. The major currencies are the US dollar, Euro, yen and Korean won. Smaller members of the basket are the Singapore dollar, British pound, Malaysian ringgit, R... [Read More]

Tracked on Aug 12, 2005 5:05:27 AM


Oil prices seem to be the straw which broke the camel's back --the Yuan's peg has been broken for good. From the People's Daily article (see link below), the higher oil prices are wrecking havoc in China's fixation of domestic oil prices. Oil suppliers are understandably reluctant to sell at the lower fixated prices, which is generating oil shortages and consequent transportation disruptions.

Posted by: Joe Rotger | August 10, 2005 at 12:28 PM

It's important to comment that an aftermath of the Yuan revaluation is the further unhitching from the US dollar peg of some other - mostly Asian - currencies.

Evidently, the Yuan - US dollar peg had them cornered, to maintain competitive prices for their exports.

The news of the need to restructure China's basket of currencies should revalue EUs, Yen, versus US dollars. Therefor, we should see a quite a glut of US dollars being exchanged for Asian currencies.

In other words, US dollars should head further south.

CNOOC not being able to buy UNOCAL did not help the US dollar either.

The chinese are probably wondering what to do with all this paper called US dollars?

I'll bet politically they're looking at ways to get back to the US.

...Maybe buying oil will get their revenge?

Posted by: Joe Rotger | August 11, 2005 at 06:27 PM

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