Report on the interbank FX market in Q1 2004

Market performance

During the 61 trading days in the first quarter of 2004, accumulated turnover of the four traded currencies amounted to US$41.31 billion. The average daily turnover stood at US$677 million, decreasing by 24.8 percent from the previous quarter and increasing by 37.8 percent year-on-year. In March 2004, the accumulated turnover was US$15.04 billion and the average daily turnover reached US$ 654 million.

Compared with the previous quarter, the average daily turnover of USD, HKD and EUR decreased, while that of JPY increased. Compared with the first quarter of last year, the average daily turnover of USD, HKD and JPY went up, while that of EUR declined.

In the first quarter 2004, the USD fluctuated slightly. At the beginning of this year, the weighted average price of USD was 8.2769. During this quarter the weighted average price of USD reached a high of 8.2774 and a low of 8.2766, fluctuating within an 8-bp band. It closed the quarter at 8.2770, three bps higher than that of the previous quarter.

The HKD went down slowly. Opening the year at 1.0656, the weighted average price of HKD reached the quarter-high of 1.0658 and the low of 1.0612. On January 18, affected by the news that China UnionPay Co., Ltd. officially launched use of RMB bank cards in Hong Kong, the weighted average price of HKD slumped to 1.0615, but recovered quickly the next day. It then went down gradually, closing the quarter at 1.0614, 43 bps lower than it did in the previous quarter.

JPY reached bottom and rebounded. The weighted average price of JPY started this year at 7.7345, remained stable before the second ten days of February, and showed weakness in the third ten days of February. On March 8, the weighed average price of JPY reached bottom at 7.3865 and then rebounded until the end-quarter at 7.9304, the highest point this quarter, and 1894 bps higher than that in previous quarter.

The EUR decreased with some fluctuation. The weighted average price of the EUR opened this year at 10.3951. During the first quarter, it reached a high of 10.6556 and a low of 10.0047. It closed the quarter at 10.1218, 2818 bps lower than it did in the previous quarter.

Compared with the previous quarter, the FX supply decreased while demand increased, thus the excess of FX supply over demand shrank in the first quarter of this year. The average daily surplus went down by 30.9 percent from the previous quarter but went up 45.9 percent year-on-year.

In this quarter, financial institutions handled 24 interbank FX deposit deals. There were 22 USD deals with an accumulated turnover of US$780.15 million, one EUR deal with a turnover of 8 million and one HDK deal valued at 72.43 million. Six more financial institutions signed up for interbank FX deposit brokering services this quarter. As of the end of Q1 2004, 120 institutions have signed agreements with the CFETS for FX deposits.

Brief analysis

The domestic economy grew rapidly. The growth of GDP was 9.7 percent in the first quarter of 2004. The prosperity index of industrial enterprise production for the same period hit the highest level in recent years. The profit level continues to rise, but the rising range of prices reached 3.2 percent in January and 2.1 percent in February. Economic development experienced a resource bottleneck. The central bank, the State Development Planning Commission and the Ministry of Finance jointly issued corresponding measures to contain blind investment and low-level duplicated construction. These measures have already had initial effects. In the government work report, Premier Wen Jiabao called for awareness of scientific development and set high on the agenda the tasks of strengthening and improving macro adjustment, and maintaining rapid and steady economy development.

The rate of increase of imports exceeded that of exports, bringing about a comparatively large trade deficit. Statistics from Customs showed that in the first quarter of 2004, the grand total of exports and imports hit US$239.85 billion, up 38.2 percent year-on-year. The volumes for exports and imports were US$115.71 billion and US$124.14 billion respectively, up 34.1 percent and 42.3 percent year-on-year. The accumulated trade deficit was US$ 8.43 billion. It is expected that imports will expand the momentum of rapid growth in the near future.

The FDI kept growing. Statistics from the Ministry of Commerce demonstrated that in first two months of 2004, 6,025 new foreign-funded enterprises emerged, up 11.74 percent year-on-year. The contracted FDI reached US$19.14 billion, up 34.54 percent compared with the same period last year. The utilized FDI hit US$8.32 billion, up 10.28 percent over the same period last year.

The RMB exchange rate remained stable, and FX utilization was facilitated. Hearsay about the RMB exchange rate still appeared on occasions in the first quarter, but the Chinese Government's position on this question is clear and consistent. In both the government work report by Premier Wen Jiabao and the Q1 regular meeting of the Monetary Policy Committee of the PBC, the attitude toward RMB exchange rate is to maintain "basic stability on the reasonable and equilibrium level".

The State Administration of Foreign Exchange in its working conference 2004 stated requirements to streamline procedures, loosen restrictions, and further facilitate trade and investment. Since the October 2003 policy on individual FX purchases, individual residents have purchased above US$470 million using personal accounts in the five months as of February 2004, up 50 percent year-on-year.