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Central Bank Pushes Foreign Exchange Reform

Central Bank Pushes Foreign Exchange Reform

Pushing China's foreign exchange reform ahead by another step, the central bank on November 25 carried out its first currency swap deals with local banks in a move that could help bring more flexibility to the market.

In spot dealings, the Chinese yuan closed at 8.0805 to the US dollar on November 24.

The swap deal did not seem to have any immediate effect on the onshore yuan spot market.

Offshore, non-deliverable forwards--a measure of expectations for the yuan's value that has no direct effect on current exchange rates--moved toward the one-year swap rate set by the central bank, to 7.78 yuan to the US dollar in the morning from 7.75 yuan to the US dollar late on November 24.

On November 24, China's State Administration for Foreign Exchange announced it would also introduce a new currency trading system allowing interbank market members to trade directly with each other. It also invited qualified members to apply to become market makers for yuan spot trading.

The yuan does not trade on world markets and Chinese regulators sharply restrict buying and selling on the sole official Chinese exchange. Daily fluctuations in the yuan's value, which is linked to a basket of currencies of major trading partners including the United States, are limited to 0.3 percent up or down from its opening level.

Since a 2.1 percent revaluation of the yuan on July 21 to 8.11 yuan per dollar, the Chinese currency has gained 0.36 percent.