China plans foreign exchange reform to make yuan market-driven

19 Apr, 2004

China will take steps to let market forces play a bigger role in determining the yuan's value and pave the way for its full convertibility, central bank chief Zhou Xiaochuan was quoted on Sunday as saying.
"The demand for making the renminbi (yuan) fully convertible is becoming higher and higher as the renminbi becomes an important currency in Asia and even globally," the China Central Television (CCTV) quoted Zhou as saying.
"Building a more market-driven trading system for the renminbi is now a task of top priority," he said.
China would develop a "unified" forex trading system to let market forces play a bigger role in determining the yuan's value, Zhou was quoted as saying. He did not elaborate. Currently, the official forex market is tightly controlled with commercial banks as the backbone and the central bank the biggest player, which keeps the yuan stable through intervention.
Central bank officials have outlined steps to shore up the market, including allowing banks to become "market makers" and letting firms participate in the market.
US officials have been pressing China to re-value the yuan, which is pegged at about 8.28 to the dollar, amid criticism that the yuan is keeping Chinese exports unfairly cheap at the cost of US manufacturing jobs.
China has resisted pressure to revalue, saying it will make the yuan more flexible by introducing reforms according to its own timetable.
Speculation has mounted in recent months that China will either widen the wafer-thin trading band or re-peg it to a basket of currencies in a move that could help deflect US pressure.
China's foreign exchange regulator said on Friday it would let domestic firms keep more foreign currency earnings under gradual reform of the country's strict currency controls.
The move would help ease upward pressure on the yuan, which is convertible on the current account, analysts say. The yuan's full convertibility is seen at least five years away.

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