China Maintains Stable Currency Through Transparent Market Operations

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Last updated at: (Beijing Time) Tuesday, August 12, 2003

China Maintains Stable Currency Through Transparent Market Operations

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China has managed to maintain the stability of the exchange rate of its currency, Renminbi yuan, with the US dollar through transparent market operations despite an increase in the number of transactions.

Chen Lifeng, a prestigious researcher with the Shanghai-based China Foreign Exchange Center, said the combined volume of China's interbank foreign exchange deals reached a record high during the first half of this year. Transactions worth 59 billion US dollars, were completed in US dollars, Hong Kong dollars, Japanese Yen and euros.

But the weighted average exchange rate of the US dollar against the yuan fluctuated slightly between 8.2775 and 8.2766 yuan.

The number of foreign exchange transactions has been growing since early this year because of a rapid increase in direct foreign investment and corporate revenue from exports, said the researcher.

China absorbed 51 billion US dollars in contractual foreign investment during the first six months of the year, including 30 billion US dollars in actual investment, up 40 percent and 34 percent, respectively, official statistics showed.

China's foreign trade grew by 34 percent year-on-year in the first half year despite the outbreak of severe acute respiratory syndrome (SARS).

The outside pressure on China for a stronger Chinese currency also attracted a large amount of foreign exchange, which contributed to the oversupply of foreign currency.

China's trade surplus stood at 4.5 billion US dollars during the first half of this year.

But China's foreign exchange reserve increased by 60.1 billion US dollars, compared with the 30 billion US dollars in actual foreign investment and 4.5 billion US dollars in trade surplus.

Dealers at the foreign exchange center said the figures indicated about 20 billion US dollars in foreign exchanges entered China's interbank market in apparent bids to speculate on possible appreciation of the Chinese currency.

In order to maintain the stable exchange rate amid oversupply of foreign currency, the People's Bank of China, the country's central bank, increased its supply of Chinese currency to buy foreign currencies since early 2003.

According to a monetary report published by the central bank earlier this month, the bank purchased 387.6 billion yuan (47.2 billion US dollars) worth of US dollars during the six month period.

In the meantime, a central bank official said the bank also bought back 277.8 billion yuan (33.8 billion US dollars) of Chinese currency through the issuance of treasury bonds and other financial bonds.

The central bank purchased 74.2 billion US dollars in foreign exchanges using 614.2 billion yuan in 2002, or 129 percent of the added value of the Chinese currency.

The State Development Bank announced recently its plan to issue its first US dollar-denominated bonds at the interbank market to financial institutions, worth 500 million US dollars.

The move also constitutes part of the efforts made by the central bank to absorb the US dollar denominated capital in excessive supply at the market, a non-administrative measure to ease the pressure on the Chinese currency to appreciate, said Chen Lifeng.

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