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China plans reforms that could prepare way for yuan float

China's central bank has insisted that it will let markets set the yuan's value following last week's 2.1 percent revaluation, as it prepares to launch financial derivatives that could pave the way for an eventual float.

Beijing will first move ahead with plans to launch financial derivatives such as futures and options, Wu Xiaoling (吳曉靈), a central bank vice governor, was quoted as saying in an interview with the official Shanghai Securities News.

"The foreign exchange rate will fluctuate given changes in market supply and demand and therefore you cannot expect the central bank to control its fluctuations," Wu said.

"We will prepare to launch forex derivatives as tools for financial institutions and enterprises to control risks," she said.

Her comments echoed those of central bank chief Zhou Xiaochuan (周小川) earlier this week, who said banks must develop the forex market and financial tools so that companies can better hedge risk.

Although such statements are hardly new, they take on a new urgency in light of last week's reform if Chinese companies are to navigate a forex regime that in theory should be more volatile.

Wu gave no timeframe for the reforms. But a spokesman with the Shanghai Foreign Exchange Trading Center said China was preparing to launch forwards trading on the interbank market as early as the end of the year.

"The technical preparation for trading forward contracts has already been completed and the application for starting the business has been submitted to the central bank and foreign exchange authority for consideration," the official said.
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