China expanded its foreign exchange trading system yesterday, having made clear the move does not indicate an imminent revaluation of the yuan, even as the US condemned Beijing's "highly distortionary" currency regime as threatening global growth.
The introduction of eight new currency pairs comes amid intense speculation that China could revalue the yuan at any moment and as Washington ratchets up pressure to ensure there is change to China's forex regime.
On Tuesday, the US Treasury's biannual report on trade partner currency practices called China's yuan policy "highly distortionary," posing "a risk to China's economy, its trading partners and global economic growth."
It just stopped short of calling China a currency manipulator, which under statutory conditions laid down by the 1988 Omnibus Trade and Competitiveness Act could pave the way for Congress to impose sanctions.
However, it warned that "if current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for [such a] designation."
The central bank refused to comment on the report, saying that China's position on the issue was well known.
In Shanghai, the China Foreign Exchange Trade System (CFETS) began trading the US dollar against the Hong Kong dollar, the yen, the pound, the Swiss franc, the Australian dollar, the Canadian dollar and the euro in a development seen as a necessary step before any adjustment to the yuan. The euro was also trading against the yen.
Deals, which are being executed in blocks of a minimum US$100,000 and maximum of US$10 million, got off to a good start, traders said.
Ten mostly foreign banks are market makers, providing sell and buy quotes, and more than 200 CFETS member banks are receiving market quotations.
Price-setting banks include Deutsche Bank, HSBC, ABN Amro, Royal Bank of Scotland, Citibank, Bank of Montreal and ING as well as the Bank of China, Industrial and Commercial Bank of China and CITIC Industrial Bank.
Chinese officials say the trading expansion is a necessary step towards the diversification and reform of the country's currency regime, widely seen as woefully underdeveloped given its US$1.6 trillion economy.
"It will help develop China's interbank foreign exchange market, diversify products, activate trading and enlarge trade volumes," the People's Bank of China, the central bank, said in a statement.
Previously only four yuan pairs were traded in China against the yuan -- the US dollar, Japanese yen and Hong Kong dollar. The expansion could help Chinese companies better hedge forex risks.
"The globalization of trade means Chinese companies are no longer only dealing in US dollars," said Tan Yaling, a manager with Bank of China's Global Markets.
"They [can] also deal in the Japanese yen and euro -- and [the companies] need diversified trading opportunities," Tan told the Xinhua News Agency.
The new system does not, however, expand trading against the yuan.
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