| China reforms forex rate forming mechanism |
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| Wednesday,January 04,2006 Posted: 21:15 BJT(15 GMT) Xinhuanet |
China is to introduce over-the-counter (OTC) transactions in the interbank foreign exchange market, and introduce market makers to provide liquidity, the People's Bank of China announced Wednesday.
The bank said on its website on Tuesday that OTC transactions will be allowed to be carried out through independent bilateral price inquiry and bilateral settlements based on bilateral credit authorizations.
Transactions can also be made through the traditional automatic price-matching method, which is based on centralized credit authorization and price bidding.
The move is to improve the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies, and to strengthen the pricing capability of the financial institutions, said the bank.
The central bank will authorize China Foreign Exchange Trading System (CFETS) to announce the central parity of the RMB against the U.S. dollar, the euro, the Japanese yen and the HK dollar at 9:15 a.m. of each business day, which will be taken as the central rate of the RMB for transactions.
To form the central parity, CFETS will first enquire prices from all market makers before the opening of the market, and then calculate out the central rate of the RMB against U.S. dollar for the day. The rate will also be the basis for CFETS to determine the central parity of the RMB against other currencies.
According to the bank, the band within which the RMB is allowed to move in trading against foreign currencies, and the limits on the spread between the U.S. dollar selling rate and buying rate quoted by banks to their customers will remain unchanged.
The introduction of the OTC will only change the formation of the central parity of the RMB exchange rate, which will not result in major fluctuations of the RMB exchange rate, said a spokesperson of the bank.
"The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level," said the spokesperson.
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