REPORT ON THE INTERBANK LENDING &BOND SYSTEM IN JULY 2004

Market performance

With 22 trading sessions in July, the accumulated turnover of the four trading currencies amounted to 13.879 billion in US dollar terms. The average daily turnover stood at US$631 million, down 5.2 percent from the previous month and up 20.7 percent year-on-year. During the first seven months of the year, accumulated turnover reached US$93.2 billion with the average daily figure hitting US$643 million.

The average daily turnovers for the USD, HKD, JPY and EUR all decreased month-on-month. Compared with the same period of 2003, average daily turnover increased for the USD, HKD and JPY, but dropped for the EUR.

The USD fluctuated slightly in July. Opening the month at 8.2767, the weighted average price of USD reached a monthly high of 8.2769 and low of 8.2766, moving within a 3-bp band. It closed the month at 8.2769, three bps higher than the previous month.

The HKD fluctuated in July. The weighted average price of HKD was 1.0606 at the beginning of this month, the lowest price of the month. It then fluctuated moderately and ended at a monthly high of 1.061, three bps higher than in June.

The JPY slowly decreased in July. Starting the month with a weighted average price of 7.6524, the JPY reached a monthly high of 7.6686 on July 12, affected by Japanese election results. It then tumbled to 7.3921, the closing and lowest price of this month, down 2,255 bps from one month before.

In July, the EUR fell after a brief rise. The weighted average price of EUR climbed slowly from 10.0789 at the beginning of the month to a high of 10.3026, then it continued to drop and close the month at 9.9681, the lowest price of the month, 340 bps lower than the previous month.

Compared with the previous month, FX supply decreased while demand increased, thus narrowing the excess of FX supply over demand. The average daily surplus stood at US$491 million, down 8.81 percent month-on-month but up 15.38 percent year-on-year.

In July 2004, 11 interbank foreign currency deposit deals, all in USD, were conducted. As of the end of July, 125 institutions have signed agreements with CFETS for foreign currency deposits.

Brief analysis

The macroeconomic adjustment measures have shown significant effects. Key economic indicators should continue to drop smoothly and a "soft landing" is expected in economic growth. With decreasing market anticipation of an RMB interest rate rise, the inflow of hot money tends to slow down and the pressure of RMB appreciation is being alleviated.

Foreign trade remained in surplus. According to statistics from Customs, in the first six months of 2004, the grand total of exports and imports hit US$523 billion, increasing 39 percent year-on-year. In June 2004, foreign trade continued the trade surplus since May and set new monthly records.

FDI utilization kept growing. According to statistics from the Ministry of Commerce, 21,688 new foreign-invested enterprises were approved in the first six months, increasing 14.89 percent year-on-year; contracted FDI reached US$72.697 billion, up 42.66 percent year-on-year. Utilized FDI hit US$33.883 billion, up 11.99 percent year-on-year.

Changes in the domestic and global environment are conducive to the stability of RMB exchange rate. The FX administrative department has adopted various measures to further facilitate foreign trade and investment and to strengthen management on inflow and settlement of short-term capital. The 0.25 percent rise in the United States Federal Funds Rate allows more flexibility and independence for China's monetary policy operations to meet the demand of domestic economic performance.