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China Expands Currency Trading

May 19, 2005|From Reuters

SHANGHAI — China launched a new foreign exchange trading system Wednesday that allows domestic trading in currencies other than the yuan, a milestone in the country's effort to reform its tightly controlled currency regime.

The system, allowing trade in eight more currency pairs, went live hours after Washington sounded its harshest warning yet on Beijing's rigid foreign exchange policy, saying the country could be labeled a manipulative trading partner unless it took swift steps toward a more flexible yuan.

China shot back Wednesday by saying such accusations were unreasonable. Economists say the new trading platform -- which does not involve yuan trading -- is itself a step toward a more flexible yuan.

The China Foreign Exchange Trade System's new platform plays host to trading in the U.S. dollar against the euro, the yen, the Hong Kong dollar, the British pound, the Swiss franc, the Australian dollar and the Canadian dollar, plus the euro against the yen.

Officials have assembled a lineup of foreign and local banks to launch the system, including ABN Amro and Bank of China, but economists are divided as to whether the market will attract the business it needs to take off long term.

Bankers said a number of trades had gone through the system within minutes of its launch.

"Our aim was just to test the waters and try and grab a leading position in this," a Beijing-based bank dealer told Reuters shortly after the system went live. "We don't know whether we can make any money, though."

Some observers had long expected Beijing to make a move to revalue its yuan. In a rare public denial Friday, China's central bank governor dismissed reports that had fueled such speculation as incorrect.

China, whose currency has been pegged near 8.28 per dollar since the 1997-98 Asian financial crisis, has faced pressure from the United States and other countries to let the yuan appreciate.

They say the currency is unfairly cheap at current levels, giving Chinese exporters an advantage in world markets.

Beijing has vowed to free up the yuan on its own timetable.

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