REPORT ON THE INTERBANK FX MARKET IN AUGUST 2004

Market performance

With 22 trade sessions in August, the accumulated turnover of the four trading currencies amounted to 14.04 billion in US dollar terms. The average daily turnover was US$638 million, up 1.2 percent from the previous month and 18.0 percent year-on-year. During the first eight months, the accumulated turnover reached US$107.24 billion with a daily average of US$642 million.

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

The USD went down slightly in August. The weighted average price of USD was 8.277 at the beginning of this month, the highest price of the month. Then it dropped slowly, and closed this month at 8.2766, three bps lower than the previous month.

The HKD fluctuated within a narrow range. Opening the month at 1.0609, the weighted average price of HKD reached a monthly high of 1.061 and low of 1.0607, moving within three bps. It closed this month at 1.0607, down three bps month-on-month.

The JPY slowly rose in August. The weighted average price of JPY began the month at 7.4412, before inching upward to a monthly high of 7.5749. It then fluctuated and closed this month at 7.5422, 1,501 bps higher than the previous month.

The EUR climbed before dropping in August. After beginning the month at 9.9741, the weighted average price of EUR climbed slowly to a high of 10.2351 in the middle of the month, before falling to a monthly low of 9.9313. It closed the month at 9.9875, 194 bps higher month-on-month.

As compared with the previous month, FX supply increased while demand decreased, thus expanding the excess of FX supply over demand. The average daily surplus went up by 6.68 percent month-on-month and 10.56 percent year-on-year.

In August 2004, nine financial institutions handled 13 interbank foreign currency deposit deals, all in USD. As of the end of August, 125 institutions had signed agreements with CFETS for foreign currency deposits.

Brief analysis

The macro adjustment measures continued to take effect. China Monetary Policy Report Quarter Two by the People's Bank of China (PBC) predicted that domestic and international environments would continue to provide favorable conditions for the sustained, harmonious and healthy growth of the economy in the second half of this year.

Foreign trade remained in surplus. According to statistics from the Customs, in July total exports and imports hit US$99.98 billion, up 34 percent year-on-year. The trade surplus was US$2.04 billion.

The FDI kept growing. According to statistics from the Ministry of Commerce, 25,217 new foreign-invested enterprises were approved in the first seven months of the year; contracted FDI reached US$82.656 billion; utilized FDI hit US$38.403 billion, increasing year-on-year by13.36 percent, 39.69 percent and 15.14 percent respectively.

FX management was further improved. SAFE's verification of large-sum and suspicious FX transactions, begun since last year, has shown some initial effects. Recently, SAFE issued a list of administrative licensing items and a notice of FX administration on personal foreign trade.

Both the domestic and foreign environments are conducive to the stability of the RMB exchange rate. The PBC's second quarter monetary policy report pointed out that a key task in the second half of 2004 would be to maintain the fundamental stability of the RMB exchange rate at an appropriate and equilibrium level. Provisional rules regarding FX funds held by the domestic insurance industry were recently promulgated, which initially allow insurance companies to invest FX funds in overseas financial markets under strict supervision.

The Fed again decided to raise its target for the federal funds rate by 25 basis points, which alleviated the pressure on RMB appreciation internationally and interest rate hike domestically.