DEEPEN FOREX MARKET RESTRUCTURING, CONFRONT THE CHANLLENGES AFTER ENTRY INTO THE WTO

Cultivate market participants to enhance the market vitality

The number and activities of market participants are the determining factors of the efficiency and vitality of a market. Permission for diversified participants to enter is an important step on the way to a mature forex market. The increase in the number of market participant can advance the diversification of market participants, enhance the competition among banks, and form the price-finding mechanism and reasonable price-fixing mechanism. Therefore, the commision charged for interbank forex transaction can be reduced to allow more and more non-bank financial institutions and foreign banks to enter the interbank forex market, develop forex intermediaries, and introduce forex brokerage system, etc.

Develop diversified hedge instruments and enhance price-finding mechanism

In term of currency traded, not only need the transaction volume of other foreign currencies(except USD, JPY, HKD) with RMB be increased, but the transaction among foreign currencies should be developed gradually on the existing base, so as to satisfy the need in the foreign trade of domestic enterprises after entry into WTO. In term of transaction instruments, forward may be considered to hedge exchange rate risk.

Increase the exchange rate elasticity of RMB and enhance the risk consciousness and vitality of enterprises

Permit to take full advantage of the interbank forex market exchange rate fluctuation.

In order to alleviate the impact of adjustment of exchange rate policy, the expansion of exchange rate fluctuating range can be implemented step by step. The primary task is to take full advantage of the existing range of 0.3%, and allow the exchange rate fluctuate one or two percent every day, sending an important signal to the market that the central bank is lessening its intervention, making it convenient for the market to realize exchange rate risk.

Broaden the fluctuation range of banks?forex working capital for forex purchasing and sale with the bank system.

In order to enhance the banks independence to enter the forex market, and to make forex potfolio timely, it is suggested that the forex position fluctuation range can be gradually broadened according to practice from the existing limit from 0 to 25%, and that the banks can adjust their forex and RMB positions on the forex market based on their forex asset management the forex supply can be adjusted in the forex market in term of the operation of forex assets.

Restructure the forex purchasing and settlement system.

Under mature circumstances, China should gradually lift the restriction on enterprise’s buying and selling of forex, and develope the proportional buying and selling system to a voluntary one.

Adjust the existing exchange rate mechanism.

The existing practice that the Central Bank publishes the middle rate should be changed. On the condition that the supply-demand of the market can reflect the actual transaction, several major forex-designated banks could be chosen to publicize the middle rate according to the supply and demand of that day and the weighted average price of the interbank forex market the day before. And the middle price could be changed and requoted during the day.

Prolong the forex transaction time.

Add afternoon transaction, and permit banks to enter market for more than one time and direction in one business day, so as to make it convenient for banks and enterprises to hedge exchange rate risk.

Improve the adjusting measures of the Central Bank

In order to adapt to the requirements on the Central Bank adjustment of forex market after entry into the WTO, China should gradually change the passive situation of the central bank in the adjustment of exchange rate and take flexible economic adjusting measures.

Set up target of RMB exchange rate adjusting.

Considering the diversification tendency of international forex market and foreign trade of China, China should properly give up the nominal exchange rate fluctuation and stick to the real rate. Whether the Central Bank maintain or decrease the intervention frequency, it will help the Central Bank improve its exchange rate policy operation and truly reflect the requirement on exchange rate by real economy.

Build up forex equilibrium fund and isolate the supply-demand of interbank forex market from the national forex reserves.

The Ministry of Finance can transfer part of the existing forex assets to provide substantial base for the intervention by the central bank.

Decrease the direct intervention frequency of the Central Bank.

Now the Central Bank takes a large part in the formation of exchange rate. After the expansion of exchange rate fluctuation range and gradual pursue of the voluntary forex selling and buying system, the Central Bank should decrease the frequency of market intervention, implement brokerage system, and trade thorough commercial banks or other intermediaries.

Set up market supervision and alerting index and system.

After the expansion of fluctuation range of exchange rate, the Central Bank should put enphasis on the supervision of forex market, especially the supervision of large amount capital flow, increase the transparency of its operation, and stabilize the market anticipation.

Strengthen the policies coordination between local currency and foreign currency.

The Central Bank should gradually shift to use monetary policy lever like interest rate and money supply to influence the exchange rate, take forex policy as part of the monetary policy, and keep the coordination between exchange rate policy and monetary policy.

(by Dai Shihong, Chief, Forex Market Section of BOP Department, State Administration of Foreign Exchange)