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Rate measures to help banks reduce risks
By Zhang Dingmin (China Daily)
Updated: 2005-09-26 05:29

The latest adjustments to China's exchange rate system announced on Friday will give banks more pricing flexibility and help reduce speculation in the marketplace, the central bank said yesterday.

People's Bank of China Governor Zhou Xiaochuan (L) and Finance Minister Jin Renqing attend the annual meeting of the World Bank and International Monetary Fund in Washington September 24, 2005. [Xinhua]

The measures, following the nation's reform move on July 21 to adopt a managed floating exchange rate system with reference to a currency basket, "will serve to further increase the banks' capability in setting prices and effectively controlling price risks, foster fair and orderly competition among the banks and improve financial services," a spokesman with the People's Bank of China said yesterday.

Last Friday, the band of renminbi exchange rate against non-US dollar currencies in the spot foreign exchange market was widened from 1.5 per cent to 3 per cent around the central parity, which the central bank said will help commercial banks avoid losses that might happen under previous arrangements.

But the central bank kept the floating band for renminbi against the US dollar unchanged, saying it reflects the high liquidity of the currency, in which 80 per cent of China's foreign trade transactions are settled.

Commercial banks were also given a broader range between their buying and selling rates for the US dollar when trading with clients, which the central bank said will increase the trading costs for speculators and therefore help maintain the stability of the market.

The measures will promote the effective adjustment of the renminbi exchange rate based on market supply and demand with reference to a basket of currencies, and strengthen the fundamental role of the market in price finding and risk aversion, the central bank said.

"Appropriate enlargement of the spread between the selling and buying prices of the US dollar quoted by the banks to their customers may increase the transaction cost of the speculators, thus helping maintain the basic stability of the renminbi exchange rate," the spokesman added.

On July 21, China allowed its currency, known as the yuan or renminbi, to appreciate by 2.1 per cent against the US dollar and started linking its currency to a basket of foreign currencies instead of the US dollar only.

Under that system, the yuan was allowed to rise or fall 0.3 per cent against the dollar and a wider 1.5 per cent against non-dollar currencies, such as the yen and the euro, in the interbank market.

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