Beijing tightens currency grip with new market

SHANGHAI (Reuter): After days of confusion, a Chinese interbank currency market opened yesterday as part of Beijing's efforts to tighten its grip on capital flows and move towards currency convertibility.

The first day of operation on the National Foreign Exchange Trading Center went smoothly, traders said.

The Chinese yuan opened at 8.6810 against the dollar and edged lower to end the 1-1/2 hour session at 8.6908.

Foreign banks have been relegated to the sidelines of the interbank market, which is primarily for domestic banks to trade on behalf of their local clients. They are now mainly confined to acting as agents for foreign-invested companies on the old swap centers, which have been retained.

Under the previous system local and foreign enterprises could directly swap Chinese yuan and dollars under a matching system on the 100 or so swap centers scattered around China.

Now foreign companies must go through overseas banks to match their orders on the swap markets.

Chinese enterprises are required to sell their foreign exchange earnings to local banks for trading on the new interbank market. By channeling hard currency flows through the banking system Beijing will have far greater control over capital flows.

Financial authorities kept foreign bankers waiting almost until the last minute before giving details about how the new foreign exchange system will work.

Uncertainty

There is still some uncertainty about how the market regulations will be applied in practice.

The People's Bank of China will actively intervene in the new market to ensure stability. In addition, the central bank has imposed tight limits on fluctuations so that the rate can move only within a narrow band.

Movement in the dollar-yuan exchange rate will be limited to 0.3 percent of the previous day's weighted average, according to traders citing central bank regulations.

Banks can quote their customers a price fluctuating within a band of 0.25 percent of that rate.

The weighted average last Friday on the old five-city swap center based in Shanghai, the precursor of the new market, was 8.6987. This limited Monday's fluctuation of the yuan to a low of 8.7248 and a high of 8.6726, traders said.

Traders on the new interbank market said each trade was kept within 20 basis points of the last quoted price.

It was not immediately clear how many of China's 18 city-level swap centers had joined the new market.

The original plan was to add another five cities to Beijing, Tianjin, Hangzhou, Shanghai and Shenzhen that hooked up on March 1 to form the nucleus.