China expands FX market

New angles

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China has launched an interbank foreign exchange trading system, giving firms the ability to trade an additional eight currency pairs onshore. The move has led to speculation that a shift in China's currency policy may be on the cards.

"The start of China Foreign Exchange Trading System (CFETS) is significant because it further develops a framework that will assist in the expected implementation of a more flexible currency regime in China," says Peter Clarke, Singapore-based head of institutional foreign exchange sales for Asia at Deutsche Bank.

CFETS will allow banks to trade the US dollar versus the Australian dollar, Canadian dollar, euro, Hong Kong dollar, sterling, Swiss franc and yen, as well as the euro/yen currency pair. Domestic firms were previously only allowed to trade a small number of currencies – the euro, Hong Kong dollar, yen and US dollar – against the renminbi (RMB).

The move has prompted speculation that the launch of CFETS is the first step in a programme to liberalise the renminbi, currently pegged at 8.28 to the US dollar. "Part of the reason we expected no change in terms of the exchange rate mechanism was because the market structures that are integral to introducing currency flexibility have not been in place," says Richard Yetsenga, Asian foreign exchange strategist at HSBC.

"Now one of those – establishing a market-based domestic exchange rate system – has been implemented. It improves the knowledge base of the domestic market, it improves the range of products that the domestic market is used to trading and it improves the ability of the domestic market to manage the risk that comes with currency volatility."

Filling gaps

Ten banks will initially act as market-makers on CFETS, including seven foreign banks. "The advanced electronic trading and clearing platforms will facilitate domestic institutions' forex trade and clearing, fill gaps in the domestic forex market and perfect the domestic market system, as well as meeting the growing demands of the domestic marker for investment, financing and hedging needs," says Steven Metzler, executive director of technology alliances, forex and futures at ABN Amro, one of the appointed market-makers. The other nine approved dealers are: Bank of Montreal, Bank of China, Citibank, Citic Industrial Bank, Deutsche Bank, HSBC, Industrial and Commercial Bank of China, ING and Royal Bank of Scotland.

Separately, China has also released guidelines for the trading of Treasury bond and bill forwards, part of its efforts to develop the country's interbank bond market. The rules are effective from June 15. "All these moves actually go together with forex flexibility because to develop the onshore forward market, you need to have a proper yield curve. And to do that you need to develop the interest rate market," says Irene Cheung, head of Asia sovereign and forex trading strategy at ABN Amro.

Rahul Jhaveri

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