Bloomberg News

China Tells Banks to Guard Against Currency Risk

November 01, 2005

China's government told commercial banks and other companies to use derivatives and adopt measures to guard against foreign-exchange risk as the nation moves toward a more liberalized currency system.

Currency experts from Industrial & Commercial Bank of China (601398), the biggest lender, instructed representatives of 19 banks, including 5 foreign-invested lenders, on how to manage foreign- exchange risk at a meeting on Oct. 28, the State Administration of Foreign Exchange said on its Web site today.

``In tandem with the currency reform, the currency regulator is successively issuing foreign currency management policy measures,'' the statement cited Wei Benhua, deputy director of the regulator, as saying. ``This is to provide more convenience for trade and investment while curbing speculative inflows and upholding stability in the exchange rate.''

China is under pressure from the U.S., Japan and European governments to let the yuan trade more freely after ending a decade-old peg to the dollar on July 21. China will let market forces play a bigger role in setting the currency's value once domestic companies have had a grace period to adjust to the new system, central bank Deputy Governor Ma Delun said on Sept. 9.

Officials from 18 of China's largest dealers in foreign currency, including oil refiners, steelmakers, electronics makers and transport companies, attended last week's meeting held by the Beijing-based foreign-exchange regulator, today's statement said.

Currency Basket

The yuan's value has changed little since the central bank reset the currency's value at 8.11 against the dollar, a 2.1 percent appreciation, and replaced the peg with a link to a basket of currencies. Under the new system, the central bank said it would let the yuan move by as much as 0.3 percent a day against the dollar and by 3 percent against the euro and yen.

The yuan closed lower against the dollar at 8.0845 yesterday, a 0.31 percent appreciation from its post-revaluation level. The yuan's maximum daily fluctuation against the dollar has been less than 0.1 percent since the new trading system was adopted. The yuan is a denomination of China's currency, the renminbi.

Since the July revaluation, China relaxed limits on the amount of foreign currency banks can hold and increased the quantity of yuan individuals can sell, steps toward developing the foreign-exchange market.

To contact the reporter on this story: Rob Delaney in Beijing robdelaney@bloomberg.net.

To contact the editor responsible for this story: Bruce Grant in Hong Kong at bruceg@bloomberg.net


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