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China flags more fexible yuan
(Reuters)
Updated: 2005-11-25 17:00 Shanghai-China took a big step on Friday towards
allowing a stronger, more flexible yuan, a long-running demand of the U.S.
administration, by launching a domestic currency swaps market with a $6 billion
deal.
The transaction came after the country's foreign exchange regulators
announced late on Thursday that they were going ahead with a long-awaited system
of market makers to trade the yuan against foreign currencies.
The dollars lent out by the central bank will help grease the wheels of this
new market, reducing its dominant role.
"It's all part of the more aggressive reforms to cope with the greater
currency flexibility they want to have," said Frank Gong, chief China economist
with JPMorgan in Hong Kong.
"They're definitely moving very fast down that road."
Economists said that, strictly speaking, the terms of the swap had no
implications for the future value of the yuan, known also as the renminbi.
Dealers said the central bank sold dollars to 10 domestic banks at the
current exchange rate of 8.0810 yuan per dollar with an agreement to buy them
back in a year's time at 7.85 yuan.
The implied yuan rise of about 2.9 percent reflects nothing more than the
difference between U.S. and Chinese interest rates.
Still, Ha Jiming, chief economist with CICC, China's biggest investment bank,
said the deal flashed an important signal.
"The aforementioned swap transaction suggests that the dollar/renminbi
exchange rate would be around 7.85 a year from now," Ha said in a note to
clients.
Gong noted that the participating banks would make money on the swap only if
the yield gap narrowed or if the yuan rose beyond 7.85, giving them a chance to
reverse the deals.
"This is a very significant step. In theory, the fact that the banks are
willing to do this kind of swap with the central bank implies that there is
greater acceptance of more renminbi appreciation," he said.
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