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More Banks to Trade Yuan Contract
2005-8-9 22:39:03      Bloomberg
The People's Bank of China said it will extend permission to more than 130 domestic and foreign banks to trade yuan-forward contracts, enabling them to hedge against swings in exchange rates.

Related Event: RMB Revaluation

Banks operating in China with licenses to trade the yuan against foreign currencies on the interbank market can apply to the State Administration of Foreign Exchange for permission to trade yuan forwards and yuan swaps, the central bank said on its Web site. The changes take effect from today.

``Chinese companies require better and more products and services to hedge against currency risks,'' the bank said. ``The forwards and swaps of yuan against foreign currencies allow banks to offer instruments to clients to help them protect against currency swings. The time is ripe to offer these two products.''

The change is a step toward making the yuan more flexible and follows the easing of limits on how much foreign currency domestic companies can keep from operations aboard and an increase in the amount of yuan individuals can sell as they travel abroad. China last month revalued the yuan by 2.1 percent, ending a decade-old peg of about 8.3 per U.S. dollar.

``This is a signal that the government may eventually allow the market to decide the exchange rate,'' said Wang Yumei, a currency trader at Dalian City Commercial Bank in Dalian, China, prior to the announcement. ``Every move in the past several weeks has been to pave the way for that.''

The Bank of China, the nation's largest foreign currency trader, was allowed to trade yuan-forwards in a pilot program in 1997. The program was extended to include all four of China's biggest state-owned lenders and three commercial banks in 2004.

The yuan today closed at 8.1070 per dollar, from 8.1090 yesterday. The yuan would rise to 7.81 per dollar in a year if freely traded, a gain of 3.7 percent from today's closing price, according to non-deliverable forward contracts as of 4:45 p.m. in Hong Kong. The so-called implied rate was at 7.7930 late yesterday in Asia.

Non-deliverable forwards can already be traded over-the- counter outside China. They are non-deliverable because there are limits on how much money can be taken in and out China.

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