Central bank pushes foreign exchange reform

Updated: 2005-11-25 20:17

Pushing China's foreign exchange reform ahead by another step, the central bank on Friday carried out its first currency swap deals with local banks in a move that could help bring more flexibility to the market.

The People's Bank of China confirmed that it was carrying out its first foreign exchange swap deal on Friday, but would not give more details. A Beijing-based trader for a major state-owned bank said that the central bank offered one-year currency swaps worth $6 billion at 7.85 Chinese yuan per dollar.

In spot dealings, the yuan closed at 8.0805 to the dollar on Thursday.

Analysts said that it wasn't clear exactly what mechanism the central bank was using in its swaps transactions, but said it could be selling dollars and buying yuan on the spot market, and a year later could reverse the deal at the set rate.

That would have the effect of removing yuan from the money market. At the same time, the central bank could use the swap rate to signal its expectations about how fast it expects the yuan's value to rise, they said.

The swap deal didn't seem to have any immediate effect on the onshore yuan spot market.

Offshore, nondeliverable forwards — a measure of expectations for the yuan's value that has no direct impact on current exchange rates — moved toward the one-year swap rate set by the central bank, to 7.78 in the morning from 7.75 late Thursday.