REPORT ON THE INTERBANK FX MARKET IN FEBRUARY 2004

Market performance

During the 20 trading days in February 2004, the accumulated turnover of the four trading currencies amounted to US$11.55 billion. The average daily turnover stood at US$577 million, down by 29.4 per cent month-on-month and increasing by 109.7 per cent year-on-year. (Ignoring the difference in the number of trading days, turnover of the interbank FX market decreased by 21.5 per cent month-on-month and increased by 146.7 per cent year-on-year.) During the first two months of 2004, the accumulated turnover was US$26.27 billion and the average daily turnover reached US$ 691 million.

Compared with the previous month, the average daily turnover of the USD and the HKD decreased, while that of the JPY and the EUR increased. Compared with the same period last year, the average daily turnover of the USD, the HKD and the JPY increased, while that of the EUR decreased.

In February, the USD fluctuated. At the beginning of this month, the weighted average price of USD was 8.2770, reaching a high of 8.2773. It closed at 8.2769, the lowest price of the month, and one bp higher than that of the previous month.

The HKD moved within a narrow range. The weighted average price of the HKD opened this month at 1.0641, reaching a high of 1.0654. It closed at 1.0631, the lowest price of the month, and 11 bps lower than the previous month. The weighted average price in February fluctuated within the narrower range of 23 bps as compared with 43 bps in January.

The JPY was weak. At the beginning of this month, the weighted average price of the JPY was 7.8322. During the second ten days of this month, it reached the high of 7.8523, then turned weak during the last ten days of February. At the end of February, the weighted average price was 7.5617, 2435 bps lower than the previous month.

The EUR declined after previously soaring. The weighted average price of the EUR opened the month at 10.3065. It then went up gradually, reaching 10.6556 during the second ten days of the month. It then fell to its lowest of 10.3012 at the end of February, still 318 bps more than the previous month's price.

Compared with January 2004, daily supply in the interbank FX market dropped while daily demand increased. The excess of FX supply shrank by US$3.61 billion against the previous month. The average daily surplus decreased by 35.6 per cent and increased by 200.4 per cent respectively over the previous month and the same period of last year.

In February, six financial institutions handled six interbank FX deposit deals with an accumulated turnover of US$242.31 million. Most of the trading focused on short term of one-week and two-week. The average funding rates were lower than the LIBOR for USD during the same period. Four more financial institutions signed up for interbank FX deposit brokering services. Currently 118 institutions have signed agreements with the CFETS for FX deposits.

Brief analysis

The economy grew fast, and price levels went up significantly. According to data from the National Statistics Bureau, in January the nationwide added value of industry above scale reached 334.42 billion yuan, up 7.2 per cent year-on-year. Discounting Spring Festival, it went up 19.1 per cent month-on-month. Compared with the same period last year, producer prices for industrial products increased by 3.5 per cent, purchasing prices for raw materials, fuel and power went up by 7.4 per cent, and national consumer prices increased by 3.2 per cent. Prices in urban areas increased by 2.5 per cent while those in rural areas increased by 4.4 per cent.

Foreign trade developed rapidly, seeing almost equivalent imports and exports. Primary statistics from Customs showed that in January 2004 the grand total of exports and imports hit US$71.45 billion, increasing by 17.5 per cent year-on-year. The volumes for exports and imports were US$35.71 billion and US$35.74 billion respectively, up 19.8 per cent and 15.2 per cent year-on-year. The volume for exports and imports were nearly equivalent, creating a trade deficit of US$ 30 million.

The FDI continued growing. Statistics from the Ministry of Commerce demonstrated that in January 2004, 2940 new foreign-funded enterprises emerged, down 12.2 per cent year-on-year. The contracted FDI reached US$10.2 billion, up 10.4 per cent compared with the same time period last year. The utilized FDI hit US$4.08 billion, up 13.6 per cent over the same period last year.

The RMB exchange rate policy became clear, weakening the influence of hearsay on the market. The PBC and the SAFE denied the rumor that the RMB/USD exchange rate would increase by five per cent in March. Both the speech delivered by Premier Wen Jiabao at the financial working conference on February 10 and the "China Monetary Policy Report 2003" published by the PBC on February 25 indicate that the keystone of a stable RMB exchange rate will not change. In the last ten days of February, U.S. Treasury officials met with officials of China's Ministry of Finance and the central bank. They exchanged opinions concerning development, reform and supervision of the financial system. This meeting triggered speculation that China may broaden the fluctuating range of RMB exchange rate, causing the forward exchange rate in the overseas market to appreciate sharply again. In general, market expectation tends to be rational as the influence of hearsay weakens. Meanwhile, interbank FX market turnover continued to fall because the FX administration department strengthened efforts to attack illegal capital flows.