REPORT ON THE INTERBANK FX MARKET IN APRIL 2004

Market performance

With 22 trade sessions in April, the accumulated turnover of the four trading currencies in the interbank FX market amounted to 13.52 billion in US dollar terms. The average daily turnover stood at US$614 million, down six percent from the previous month and up 52.2 percent year-on-year. During the first four months, the accumulatived turnover reached US$54.82 billion with the average daily turnover hitting US$661 million.

Compared with the previous month, average daily turnover for USD and EUR decreased, while that of HKD and JPY increased. Compared with the same period of 2003, the average daily turnover went up for USD, HKD and JPY, but dropped for EUR.

The value of USD fluctuated marginally in April. During the first ten days, the weighted average price of USD remained at 8.2769 over seven consecutive trading days. During the second ten days of this month, it fluctuated slightly and reached a high of 8.2772 and a low of 8.2768. It closed the month at 8.2771, one bp higher than it did the previous month.

The HKD slowed its downward trend in April. Opening the month at 1.0618, the weighted average price of the HKD reached a month high of 1.0624 the next day, then headed lower slowly and stabilized in the second half of this month. It reached a month low of 1.0608 in mid-month, the weighted average price of the HKD closed the month at 1.0609, five bps lower than the previous month.

The JPY went straight down in April. Starting the month at 7.9353, the weighted average price of JPY reached a monthhigh of 7.9422 the next day, and then kept tumbling till it hit 7.4994, the closing and lowest price of the month, and 4310 bps lower than last month.

The EUR stopped sliding and remained stable. The weighted average price of the EUR opened this month at 10.1552 and dropped to 9.9914 on April 12. During the last ten days of the month, the EUR remained stable and the weighted average price closed the month at 9.8998, losing 2220 bps from the previous month.

As compared with the previous month, the FX supply decreased while demand increased, thus decreasing the excess of FX supply over demand. The average daily surplus went down 9.9 percent month-on-month, up 55.1 percent year-on-year.

In April 2004, seven financial institutions handled six interbank foreign currency deposit deals (all in USD) with an accumulated turnover of US$75 million. The trading focused mainly on short-terms within three months. The average funding rate for one-week USD was 1.1967 percent, 11 bps higher than the LIBOR during the same period. As of the end of April, 120 institutions had signed agreements with the CFETS for foreign currency deposits.

Brief analysis

A series of macro adjustment measures are taken in order to guarantee the sound and stable economic development. According to statistics, China's economy maintained rapid growth momentum in the first quarter 2004. The GDP increased by 9.8 percent, economic results are faily good; and the increase in resident income accelerated. However, some new noteworthy problems arose, for instance: excessively fast-growing and large-scale investment; too-fast expansion in money supply; aggravated bottlenecks of important raw materials, energy and transportation; and intensifying pressure on price rising of major production means. The Central Committee of the CPC paid close attention to these issues and made an active response. A series of measures on law and administration were issued in succession. On April 11, the central bank raised the reserve ratio again by 0.5 percent.

China's foreign trade showed a deficit from January to March 2004. The volume of foreign trade continued its great expansion in the first quarter this year. Due to the strong demand for imported raw materials and energy, the increase in imports was 8.2 percentage points higher than exports growth, thus forming a three-month straight trade deficit. Statistics from the Customs showed that in the first three months of 2004, the grand total of exports and imports hit US$239.85 billion, increasing 38.2 percent year-on-year. The accumulated trade deficit was US$8.44 billion, up 771.9 percent from 2003. In March, the exports and imports hit a record high of US$92.24 billion, increasing 42.8 percent year-on-year. The trade deficit in March was US$540 million, up 32 percent year-on-year.

FDI kept growing. Statistics from the Ministry of Commerce showed that in first three months of 2004, 10,312 new foreign-funded enterprises were newly apporved, up 19.57 percent year-on-year. The commitment reached US$34.28 billion, up 49.15 percent compared with the same time period of 2003, and actually used foreign capital FDI rose by 7.49 percent year-on-year to hit US$14.07 billion.

The existing exchange rate regime should be long-term. Regarding such rumors as "RMB will be pegged to a basket of currencies" by media abroad, the SAFE states clearly again that China will stick to the current exchange rate regime which suits China's reality. China will further explore and perfect the RMB exchange rate forming mechanism as financial reform deepens, taking into consideration the country's economic development, the conditions of economic operation and international payments. On the one hand, the FX administration kept a close eye on cross-border capital flows, prepared to check activities violating the regulations of FX control. On the other hand, the administration continued to empower economic entities with more flexible FX. From May, the proportion of FX reserved in FX account under current accounts of domestic institutions would be lifted from 20 percent of FX revenue under current accounts the year before to 30 or 50 percent.