Onshore FX Markets and Instruments

Hai Xin

3.1 INTRODUCTION

Following the foreign-exchange reform in 1994, there has been a preliminary, limited form of foreign-exchange interbank market for spot transactions in China. Between 1994 and 2005, the regulators made a series of experiments priming market participants, including:

• • introducing two-way prices instead of one-way;

• • permitting foreign-exchange forward transactions between banks and their clients;

• • introducing market-maker systems; and

• • permitting onshore transactions between one foreign currency against another one.

With the new reform measures announced by the PBOC and SAFE between July 2005 and the end of that year (see Chapter 2, Section 2.2.5), the Chinese foreign-exchange interbank market in its fuller sense was established. Experiments by the regulators continued after 2005, including:

• • formalising the arrangement for market makers and greatly increasing the number of market makers in order to jostle the pricing mechanism more towards an over-the-counter form, which was the international norm;

• • permitting interbank trading of renminbi foreign-currency forwards and swaps