FURTHER PERFECT FOREX DEPOSIT BROKING
Preparations
Forex deposit broking is the first forex business variety introduced by the CFETS since forex spot trading began in 1994. It is a third-party intermediary service designed to meet the development demands of the CFETS, and to improve the traditional forex businesses of financial institutions. To this end, the CFETS has made considerable preparations in the fields of market analysis, business planning, system construction and staff training before its debut.
Market transactions
By the end of April 2003, the rising trade volume had totaled US$1.13 billion with 111 deals of forex deposit. The amount of a single deal increased from US$5-10 million at the initial stage to the common US$20-30 million at present. The US dollar was the most frequently traded currency. In the accumulated 111 deals, 93 deals (84 per cent) were traded in USD. As for maturities, short-term maturities dominated the market. Maturities of up to one month accounted for 88 per cent of the total 111 deals, of which 19 were overnight borrowings. These overnight borrowings accounted for 21 per cent of the total trading volume. The funding rate approached the international level. The involved financial institutions were of various types. Among the 96 institutions that signed agreements with the CFETS, 31 were Chinese banks, 39 foreign-funded banks, 18 financial and trust companies, 5 securities companies and 3 other financial institutions. Banks were major borrowers and non-bank financial institutions were most active as lenders. The piloted deposit transactions pledged against RMB effectively compensated the credit inadequacy of forex borrowers. Among the total 111 deals, 8 were pledged deposit transactions.
Difficulties confronted in the forex deposit broking
Except for the big four state-owned banks and branches of a few high rating foreign-funded banks in China, it was rather difficult for most small and medium-sized banks as well as non-bank financial institutions to obtain a credit line from most financial institutions. Moreover, most of the credit terms were too short to meet the medium and long-term fund demands. Some small and medium-sized financial institutions, with their forex business still in the cradle, impose low forex liquidity requirements, and depend less on the forex market.
According to the stipulations of the State Administration of Taxation, the foreign-funded banks are levied an operation tax at 5 per cent of their full interest earnings. The international practice, however, targets the interest earning spread (lending interest rate minus borrowing interest rate). The taxation practice in China has imposed great restrictions on foreign-funded banks’ financing in the local market.
Most banks that signed agreements with the CFETS showed a similar trend in fund balance. This has led to the failure of transactions at a certain time spot, since most members may see the similar direction in supply and demand.
Supporting policies should be further clarified. The pledged deposits piloted by the CFETS to meet the demands of financial institutions have been popular with most financial institutions. However, this business faces lots of difficulties in operation, due to restrictions on the current policies, laws and regulations.
Suggestions for the further development of market
The number of market participants as well as market capacity should be enlarged. Diversified institutions with various demands will greatly activate the market.
Trading varieties need enriching and transactions in the market need regulating. As an intermediary institution, the CFETS should be closer to the market and explore business along with financial institutions.
A credit guaranteeing system may be established. The introduction of third party guaranteeing will compensate the credit inadequacy at the initial stage of the market.
The CFETS may carry out active and effective communications with the authorities in charge, so as to acquire the guidance and support in the aspects of market accession, operation regulation and risk aversion.
The CFETS needs to further strengthen market publicity and promotion.
(by Market Dept.(I), CFETS)