Peter Brimelow: Gold superbulls remain cautious

Section:

Report: China Banks to Get Dollar Dealings

By The Associated Press
Monday, November 29, 2004

http://www.forbes.com/business/healthcare/feeds/ap/2004/11/29/ap167775
8.html

Regulators may let China's four biggest state banks
become market makers in U.S. dollar trading, paving
the way for less currency intervention by the central
bank, a state-run newspaper reported Monday.

A market maker agrees to act as either a buyer or
seller in a financial transaction when no other party
can be found. The People's Bank of China, the central
bank, is now China's key market maker in U.S. dollar
trading due to tight restrictions on foreign exchange
dealings.

Draft measures for expanding the number of market
makers for U.S. dollar trading have been completed,
and the State Administration of Foreign Exchange
-- China's top foreign exchange regulator -- will
decide when to announce them, the China Business
Post reported.

China's four biggest banks -- Industrial & Commercial
Bank of China, Agricultural Bank of China, China
Construction Bank, and Bank of China -- would be
the first market makers to be approved, the report
said, citing unnamed sources.

The report gave no time frame for the proposal's
implementation.

China tightly controls trading in its currency, the
yuan, and sets its value within a narrow band at
about 8.28 yuan per U.S. dollar.

The reported plan to allow more market makers
would not directly affect the yuan's value. But it
is part of a broader series of reforms aimed at
eventually loosening restrictions on currency
trading.

By expanding the number of financial institutions
authorized to handle U.S. dollar trading, regulators
hope to slow the surge in China's foreign exchange
reserves, which are held by the central bank.

That move would be "very welcome," said Xia Bin,
an official in a research department under the State
Council, China's Cabinet.

The plunge in the U.S. dollar's value against many
key currencies has obliged China's central bank
to boost dollar buying to keep the value of the yuan
steady. That, coupled with strong foreign direct
investment and exports, had by late September
boosted foreign exchange reserves to almost
US$515 billion (euro396 billion).

The dollar's fall has prompted mounting speculation
that China might adjust the yuan's value against the
dollar soon. Central bank officials have responded
by saying they have no timetable for foreign
exchange reform.

The yuan will "continue to remain stable at a
basically reasonable and balanced level," the China
Securities Journal cited Li Ruogu, deputy governor
of the People's Bank of China, as saying at a
meeting Sunday of the Asia Pacific Economic
Cooperation countries.

"It's impossible for us to completely stop speculative
forces or behavior, but we don't want to see domestic
or overseas individuals or institutions speculate on
the yuan," the report, published Sunday, quoted Li
as saying.

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