China starts to liberalise its currency

By Alex Singleton | 25 November 2005

China has been engaging in the largest, most significiant economic liberalisation the world have ever seen, and today it made one more step in that direction. According to BusinessWeek:

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.

As Bloomberg puts it, this is an important move toward a more freely traded currency. It ads that:

Commercial lenders will be able to quote and trade the yuan against foreign currencies from next year, the State Administration of Foreign Exchange said on its Web site. Prices for the dollar will still have to be within 0.3 percent of a daily rate set by the central bank.

U.S. President George W. Bush, who visited China last week, is pressing his counterpart Hu Jintao to make the yuan more flexible even after Hu dropped the currency's decade-old peg to the dollar. Market makers will end the central bank's monopoly on setting interbank exchange rates, paving the way for increased trading.