REPORT ON THE INTERBANK FX MARKET IN JANUARY 2004

REPORT ON THE INTERBANK FX MARKET IN JANUARY 2004

Market performance

There were only18 trading days in January 2004 because of the Spring Festival. The accumulated turnover of the four trading currencies amounted to 14.72 billion in US dollar terms. The average daily turnover stood at US$818 million, down 5.9 per cent from the previous month and up 13.6 per cent year-on-year. (Ignoring the difference in the trading days, the turnover in the interbank FX market decreased by 26.3 per cent month-on-month and 7.1 per cent year-on-year.)

As compared with the previous month, the average daily turnover decreased for USD, JPY and EUR, while increased for HKD. Compared with the same period of last year, the average daily turnover went up for USD, HKD and JPY, but dropped for EUR.

The value of the USD fluctuated. Opening January at 8.2769, the weighted average price of the USD reached the month-high of 8.2772 during the first ten days, and then fell and bottomed out at 8.2766 during the second ten days. During the last ten days of the month, it dropped again after rebounding and closed the month at 8.2768, one bp higher than that of the previous month.

The HKD went down slightly. With an opening of 1.0656, the weighted average price of the HKD secured the highest point of 1.0658 in January. On January 18, affected by the news that China UnionPay Co. Ltd. officially launched the use of RMB bank cards in Hong Kong, the weighted average price of HKD dropped to 1.0615, but went up quickly the next day. It closed the month at 1.0642, 15 bps lower than that of the previous month.

JPY jumped upward. The weighted average price of JPY started January at 7.7345, reached its high and low of 7.8068 and 7.6986 respectively, and closed the month at 7.8052, 642 bps higher over the previous month.

The EUR fluctuated at high levels. The weighted average price of the EUR at the beginning of January was 10.3951. During the month, the weighted average price of EUR reached its high of 10.6237 and low of 10.2368. At the end of January, the weighted average price of EUR was 10.2694, 1,342 bps lower than that of last month.

Compared with December 2003, both the average daily supply and demand of the interbank FX market dropped in January. The excess of FX supply over demand shrank by US$4.60 billion against the previous month. The average daily surplus went down by 6.2 per cent month-on-month but up 9.4 per cent year-on-year.

In January, seven financial institutions handled seven interbank FX deposit deals with a turnover of 223.21 million in US dollar terms. The most frequently traded varieties were over-one-month medium and long-terms. The average funding rate of one-month USD was 1.16 per cent, slightly higher than the LIBOR level in the same period.

Brief analysis

The Prosperity Center of the National Bureau of Statistics of China, after analyzing leading indexes used internationally, predicts that China's economic growth of 2004 will be equal to that of 2003, and the growth rate of GDP will reach 8.6 per cent. The quality of economic growth will be improved greatly. Insufficient consumption will constrain the accelerating economic growth. Investment in fixed assets will still prop up the economic growth, but the acceleration rate will drop to some extent.

The increase of foreign trade will slow down. As the global economy continues to recover, the scale of China's foreign trade will expand further in 2004. The possibility of declining in the exports increase should never be neglected, considering the reduced export tax rebate, soaring domestic raw material prices, and increasing protectionist measures from other countries. After the announcement of the new policy of export tax rebate in October 2003, export enterprises finished a large quantity of orders ahead of time, in order to fully enjoy the benefits of tax refunds. Statistics show that the increase in export of the fourth quarter didn't slow down as before, but rather accelerated to some extent. The export in the fourth quarter increased 40.5 per cent year-on-year, nearly 11 percentage points high as compared with last three quarters.

Utilized FDI increased modestly. Statistics from the Ministry of Commerce demonstrated that in 2003, contracted FDI reached US$115.07 billion, up 39.03 per cent year-on-year; utilized FDI was US$53.51 billion, up only 1.44 per cent year-on-year. The Prosperity Center of the National Bureau of Statistics of China analyzed the historical data on utilized FDI since 1985, and estimated that in 2004 the amount of China's utilized FDI would increase slightly, but would reach no less than US$ 55 billion.

The significance of Hong Kong banks piloting RMB business is far-reaching. The PBC authorized the Bank of China (Hong Kong) Limited to act as the clearing bank for Hong Kong individual RMB business; the China UnionPay Co. Ltd. officially launched the use of RMB bank cards in Hong Kong. These measures are not only concrete actions that implement the central government's policy of supporting Hong Kong's economic recovery, but also are an important step to promote both globalization and the international influence of the RMB, thus exerting a profound impact on the development of China's FX market.