REPORT ON THE CHINA INTERBANK FOREX MARKET IN 2003

Market performance

With 251 trade sessions in 2003, the interbank FX market concluded a record turnover of 151.13 billion in US dollar terms. The average daily turnover reached US$602 million, up 54.26 per cent over the previous year. In the fourth quarter, the most active quarter in 2003, the accumulative turnover reached US$ 54.94 billion with the average daily figure hitting US$ 900 million.

As compared with 2002, the average daily turnover increased significantly for USD and HKD, but changed little for JPY. EUR daily average volume increased by 110.9%.

The USD fluctuated modestly. Opening the year at 8.2770, the weighted average price of USD reached its high and low of 8.2776 and 8.2765, a range of 11 bps. It closed 2003 at 8.2767, three bps lower than that of the previous year.

The HKD rose before falling down. The weighted average price of HKD was 1.0610 at the beginning of 2003. Affected by the hearsay in the market, it climbed up in the last ten days of September. In the first trading session after the National Day holiday, the weighted average price of HKD soared to its year-high of 1.0714, 107 bps higher than 1.0607, the lowest price of this year. It ended the year at 1.0657, up 48 bps from 1.0609 at the year-end of 2002.

The JPY tossed upward and climbed remarkably in the fourth quarter. The weighted average price of JPY started the year at 6.9549, reached the lowest point of 6.8258, and closed the year at the peak of 7.7410, 7691 bps higher than 6.9719 at the end of the previous year.

The EUR increased steadily. Affected by the increasing USD/EUR exchange rate in global market, the RMB / EUR exchange rate went up steadily in domestic market. At the beginning of 2003, the weighted average price of EUR was 8.6744. On the second trading day it reached 8.5856, the lowest one of the year. The year-end price 10.4036 marked the highest one this year, 17249 bps higher than the 8.6787 of the previous year.

As compared with 2002, the average daily supply in the interbank FX market increased sharply while the demand decreased, leading to an excess increase of US$ 57.9 billion over the previous year. The average daily surplus jumped by 82 per cent over 2002.

In 2003, 39 domestic and foreign-funded banks as well as non-bank financial institutions handled 118 interbank FX deposit deals with an accumulative turnover of US$ 14.134 trillion, HK$ 8.731 trillion and three million. There were 104 deals with varieties of up to one month, among which there were 48 one-week deals with an average lending rate of 1.16 per cent. As of the end of 2003, 114 institutions have signed agreements with the CFETS for FX deposit.

Brief analysis

1.Booming economy in China was the sound basis for FX market development.

In 2003, China's economy, after overcoming various challenges, maintained the rapid growth and made unexpected achievements. China made new strides in its comprehensive economic strength, national fiscal situation and people's income level. The economic growth rate was expected to reach 8.5 per cent for the whole year, and GDP per capita to top US$ 1,000. The acceleration of economic growth indicates that China's economy has finished the adjustment period since Asian financial crisis, and has entered a new developing stage. The improvement of global economy offered sound external environment for China's economic growth. Its foreign trade increased energetically, and foreign capital flocked into the country.

2. Effectiveness of FX management and adjustment guaranteed orderly development of the FX market.

Supply in the interbank FX market increased while the demand decreased, thus the excess of FX supply over demand expanded. Responding to the changes of FX supply and demand, the central bank entered the market timely, balancing supply and demand, stabilizing exchange rate, and ensuring designated banks' FX purchase and sale business. In light of the too rapid rise in FX supply, the SAFE in September conducted examination specifically on designated banks' FX purchase and sale business all over the country. The SAFE stated that they would set up relevant policies and regulations as soon as possible, so as to regulate management and prevent external unidentified fund attacking China's FX market.

3.Various factors caused the increasing turnover in the FX market.

A lot of factors contributed to the remarkable increase in the turnover of the interbank FX market. The sustained rapid economic growth was a long-term fundamental factor. Besides, there were some short-term factors. For instance, overseas listed companies settled the capital, QFII settled their investment capital, designated banks sold FX to reduce position, foreign trade enterprises settled the exchange for exports in advance, and individuals and enterprises settled their FX deposits. Meanwhile, the capital inflow driven by the anticipation of RMB appreciation may also be responsible for the large increase in the FX turnover recently.

4. Devaluation of U.S. dollar brought about pressure on RMB appreciation.

Under the circumstances that US trade didn't improve notably despite its dollar devaluing greatly against most principal currencies, the stable RMB may be the scapegoat. Since the second half of 2002, Japan, US, and the Europe exerted pressures that RMB should appreciate. This caused a series of trade frictions, especially between China and the US. Although experts including Greenspan, Chairman of Federal Reserve Board all believe that even the appreciation of RMB will hardly improve US trade deficit and manufacture employment. The external pressure on RMB appreciation will remain due to the political factor in the US- the general presidential election of 2004.

5. RMB exchange rate forming mechanism will be further perfected

From February 2003 on, trading hours in the interbank FX market was extended to a whole day. In October, the interbank FX market introduced two-way trading, allowing members to buy and sell in the same trade session through the interbank FX trade system. The SAFE declared that they would further develop retail FX market, reform the system of FX purchase and sale, promote and facilitate trade and investment, steadily push forward capital account liberalization, explore market foundation for forming RMB exchange rate, perfect wholesale FX market, increase market participants, develop risk-warding instruments, improve trade mode, and expand floating range of exchange rates on the interbank FX market.

6. Prospect for RMB exchange rate movement

To alleviate the pressures on RMB appreciation and improve the BOP, the related departments adjusted a series of policies: facilitating exchange of current account, relaxing control on capital account, reducing tax rebate rate for exports, conducting specific examination, and attacking illegal capital flow. With these policies and measures gradually put in place, together with the market recognition of Chinese government's attitude of relatively stable RMB, some speculative capital will fade out.

According to the analysis from the Ministry of Commerce, in 2004, foreign trade especially export growth rate may fall obviously. With intensifying threat to export from trade protectionism, China's trade balance is likely to experience great change, even trade deficit, and market expectation may also change. It is estimated that the pressure for RMB appreciation will be alleviated to a large extent in the second half of 2004.