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Banks urged to improve forex risk controls
Updated: 2006-03-06 16:34

China's banks must improve their management of currency risks to take account of new challenges created by a more flexible yuan and the development of the interbank foreign exchange market, the banking regulator said on Monday.

Banks would have to better calculate their open positions and improve their evaluation of counterparty credit risk, the China Banking Regulatory Commission said on its Web site (www.cbrc.gov.cn).

In a recent circular, the agency also demanded that banks improve internal audits of foreign exchange risks and do a better job at managing risks arising from derivative products.

They should also hire more and better-trained traders and risk managers, the commission said.

"Effective management of foreign exchange risks by banks is necessary not only for the banks' own safety and stable operations, but also for for the smooth implementation of the yuan exchange rate mechanism and the healthy development of the interbank foreign exchange market," said Huang Yi, director of the regulator's policy and regulation department.

The notice underlines China's concern that a more flexible yuan could create new challenges for its shaky banking system.

Beijing has consistently argued that it needs to proceed carefully in freeing up the the yuan because the country's fragile banks, which are relatively inexperienced at pricing risk, could not withstand the shock of rapid movements.

China last July revalued the yuan by 2.1 percent against the dollar and shifted to a managed float. The yuan has risen another 0.9 percent versus the dollar since then.

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