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Forex Market to Grow Fast

China's foreign exchange authorities said on Friday the nation's forex market needs faster growth and pledged efforts to propel its development.

Hu Xiaolian, deputy director of the State Administration of Foreign Exchange (SAFE), also said the faster development of the forex market should be co-ordinated with greater convertibility of the local currency, or renminbi, and further improvements in the mechanism through which the currency's exchange rate is determined.

Ten years after China established a nationwide interbank forex market in a major reform, the market is still underdeveloped when compared to developed countries, Hu said in a speech published on SAFE's website on Friday.

Immature market participants and systematic constraints such as capital account controls which restrict demand and supply, as well as inadequate exchange rate flexibility are among the major reasons behind the low development level of the market, he said.

In building a developed forex market, Hu said measures will include allowing non-banking financial institutions and large corporate groups to enter the interbank market.

This would introduce market makers, foster intermediaries like brokers and a forex exchange, as well as enhance supervisory efficiency.

Product innovation will also speed up, he said. That will include allowing transactions between foreign currencies, promoting forward transactions between banks and other businesses, and launching derivatives like swaps, futures and options.

Faster market construction will require fundamental stability in the exchange rate for the yuan, along with further efforts to explore a better exchange rate-forming mechanism that fully reflects demand and supply, Hu said. He added that there should be further reform moves towards the creation of a benchmark exchange rate system.

The regulator said greater convertibility of renminbi should be pursued simultaneously, which would include reforming the mandatory forex settlement system to facilitate trade, allowing banks to play a bigger role in product development and pricing, and promote capital account convertibility of renminbi in an orderly manner.

(China Daily June 12, 2004)

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