How China arrives at yuan's value
- From: pluto <pluto@xxxxxxxxxxxx>
- Date: Fri, 12 Aug 2005 08:00:33 +0800
http://in.rediff.com/money/2005/aug/11china.htm
How China arrives at yuan's value
August 11, 2005 13:46 IST
China has for the first time disclosed the composition of the basket of
currencies used to set the yuan's value, saying it mainly includes the US
dollar, euro, yen and Korean won.
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.
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.
When China cut its currency's decade-long peg to the US dollar on July 21
and allowed it to move in a restricted float, it said the yuan's exchange
rate would be determined by a collection of unspecified currencies.
At that time, the central bank said only that it had raised the yuan's
value by about 2 per cent to 8.11 yuan to the dollar from the previous rate
of 8.27, and that the yuan would be allowed to move 0.3 per cent in either
direction each day.
Since then, the yuan has appreciated slightly on Shanghai's restricted
foreign exchange market, opening at 8.1070 yuan to the dollar Wednesday.
China's central bank also said Wednesday that it will tighten oversight of
the country's foreign exchange markets while moving to liberalise its
currency trading regime.
The statement came a day after it announced Beijing was expanding the
country's foreign-exchange forwards business and launching currency swaps.
On Wednesday, the bank said it was also allowing non-banking firms to trade
in its onshore foreign exchange market and was launching foreign-exchange
forwards on the domestic interbank market.
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."
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 programme, 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.
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