Speech by Hu Xiaolian, Deputy Director-General of the State Administration of Foreign Exchange at the Tenth Anniversary of the CFETS and Forum on China’s Money Market

Distinguished leaders and guests, ladies and gentlemen:

On behalf of Director-General Guo Shuqing and all the comrades in the State Administration of Foreign Exchange (SAFE), I would like to express our warm congratulations on the tenth anniversary of the China Foreign Exchange Trade System (CFETS).

Under the correct leadership of the CPC Central Committee and the State Council, China's FX administraton system reform made a historic stride a decade ago, and since then has obtained great successes: enterprisesÕF[1] FX demand has been met; the long-existing gap between demand and supply has been filled; the RMB exchange rate has remained stable; and national foreign exchange reserves have maintained a growing momentum. The success of this reform has played a significant role in promoting China's reform and opening up to the outside world, the development of foreign trade, and the active utilization of foreign capital. Meanwhile, the reform has initiated the process toward a convertible RMB.

As an integral part of the three items of FX administration system reform, the establishment of the CFETS has played an important role in forming an RMB exchange rate, adjusting positions in FX sales and purchases, and fortifying the central bank's intervention in and management of the market. We are quite delighted with the continuous development of the market over the past decade, having witnessed expanded turnover, diversified trading varieties, increased market participants, and improved trading services.

China's FX market needs further development and perfection as China's reform and opening-up advances and financial and FX administration system reform deepens. As shown by statistics, the daily global FX turnover is nearly US$1.3 trillion at present, accounting for one tenth of the annual global trade volume. In addition, annual FX turnover is 25 times that of trade. While China's FX market recorded a turnover of above US $150 billion last year, it is merely 18 percent of the US$850-odd billion, the figure of trade volume for the whole year. In the ten years from 1994 to 2003, China's FX turnover rose by 2.7 times while the trade volume went up by 6.3 times. From these figures, we can see the gap and, more importantly, the broad prospect for China's FX market development.

In promoting the development and improvement of the market, we should tackle the following questions: how can the FX market improve its two major functions of allocating resources effectively and maintaining a capable RMB exchange rate for the balance of FX demand and supply; how does the market meet the demand for forwards, swaps, options and futures besides making spot transactions with the diversified trading varietie; how can the FX market and the fund market develop in a coordinated and complementary manner; how can the market shift its role from policy platform to service platform; and so on and so forth. As we know, the development of the FX market needs a macro environment of system innovation and policy adjustment, for instance: the further improvement of the RMB exchange rate mechanism; advances in RMB convertibility; more flexible and effective money market instruments such as interest rates; strengthened risk management capability of banks; and more reasonable acceptance and response to market signals and macro adjustment signals by enterprises. We hold that the processes of research and discussion and of reform and practice are virtually the processes of the further development and improvement of the market. We believe that, under the strategic direction of further reform and opening up to the outside world raised by the CPC Central Committee and the State Council, with the leadership and support from the People's Bank of China and the Shanghai municipal government, and with the joint efforts of market members,China's FX market will continue to grow to be a considerable part of the global FX market, thus making greater contributions to the development of China's foreign economics and trade, the deepening of its financial and FX system reform and the overall construction of the country's financial market.