yuan: new trading system launched
UPDATE 2-China extends currency trading in reform step
Tue May 17, 2005 08:47 PM ET
(Adds comments from bankers, economists, details)
By Edwin Chan and Lu Jianxin
SHANGHAI, May 18 (Reuters) - China launched a new foreign exchange dealing system on Wednesday that allows domestic trading in currencies other than the yuan, a milestone in the country's effort to reform its tightly controlled currency regime.
The system, allowing trade in China in eight more currency pairs, came as the U.S. Treasury warned that Beijing could be labelled a manipulative trading partner unless it took swift steps toward a more flexible yuan (CNY=CFXS: Quote, Profile, Research) .
The China Foreign Exchange Trade System (CFETS) said the new system hosted trading in the U.S. dollar against the euro, yen, Hong Kong dollar, British pound, Swiss franc, Australian dollar and Canadian dollar, plus the euro versus the yen.
Officials have assembled a strong line-up of pioneering foreign and local banks to launch the system, from ABN AMRO (AAH.AS: Quote, Profile, Research) (ABN.N: Quote, Profile, Research) to Bank of China [BOC.UL], but economists are divided as to whether the market will attract the business it needs to take off long-term.
Some analysts say trade will be lively so long as the opportunity exists to earn a profit but others say the system may be constrained by a lack of foreign participation.
Bankers said a number of trades went through the system within minutes of its launch.
"Our aim was just to test the waters, and try and grab a leading position in this," a Beijing-based bank dealer told Reuters shortly after the system went live.
"We don't know whether we can make any money though."
Financial markets had looked to the launch of the new system as a time when Beijing might make a long-anticipated move to allow the yuan to appreciate. But in a rare public denial last Friday, China's central bank governor dismissed such reports as incorrect.
The system sits alongside a decade-old platform that allows trading in the yuan against the euro, yen, Hong Kong dollar and U.S. dollar.
China, whose currency has been pegged near 8.28 per dollar since the 1997-98 Asian financial crisis, has faced pressure from the United States and other countries to let the yuan appreciate as they say it is unfairly cheap at its current levels.
Washington issued on Tuesday its harshest warning yet on China's rigid foreign exchange policy. The U.S. Treasury said in a semi-annual report on trading partners' currency practices current Chinese practices were "distortionary" and posed a risk to global economic growth.
MARKET MAKERS
Beijing has vowed to free up the yuan according to its own timetable and has said reform of its banking system -- sagging under more than $200 billion in bad loans and one of the weakest links in its economy -- is a key prerequisite.
Shanghai Securities and Futures Institute economist Jin Dehuan said in the longer term the system would help China find more effective ways to determine the yuan exchange rate.
The world's third-largest trading power and top foreign investment destination is struggling to ensure capital is doled out efficiently, to offer cash-strapped firms more money-raising avenues, and to move toward market-driven interest rates.
By allowing homegrown lenders to gain experience trading currencies other than the yuan, Beijing is preparing its banking community for a more flexible, market-based currency environment.
The new system offers an example that regulators can draw on before breaking the yuan's decade-old dollar peg, while Chinese lenders can try their hand in a volatile foreign exchange arena.
CFETS named seven foreign banks and three Chinese banks as market makers for the new system. They stand ready to step in and make trades when no other buyer or seller can be found.
"The launch will enrich trading products in the domestic forex market, encourage trading and expand the market," CFETS said in a statement published late on Tuesday on the Web site of the central People's Bank of China (www.pbc.gov.cn).
Speculation in recent weeks of a yuan policy change alongside the platform's launch has been intense, particularly after central bank chief Zhou Xiaochuan said last month there were no serious political or technical obstacles to a yuan change.
Chinese Premier Wen Jiabao on Monday said yuan reform was a sovereign matter and the country would not bow to foreign or speculative pressure.
Economists say CFETS's new platform essentially consolidates the current practice of numerous over-the-counter trades, providing a common forum for banks to execute currency trades.
"This is not a new business for banks in China," Standard Chartered economist Stephen Green wrote in a report last week.
The exchange commissioned news and information provider Reuters Group Plc. (RTR.L: Quote, Profile, Research) to help put in place the electronic platform across which the new currency pairs would be traded. ($1=8.276 Yuan)
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Pennies not a zero sum game as much as some zero game.
