Evolution of China's Foreign Exchange Regime (III)
Source: Fazzaco
Chapter III Exchange to Change (2005-2015)After the Asian financial crisis, RMB maintained stable for about 7 years since China had promised the RMB would not depreciate while facing appreciation pressure due to China’s economic boom, followed by a series of active measures and policies. On July 21, 2005, the People's Bank of China released RMB exchange rate formation mechanism reform plan, changing the policy that RMB pegging to US dollar to a floating exchange rate system that refers to a basket of currencies. RMB exchange rate appreciated 2.1 percent at one time to 8.11 USD/CNY.The reform brought about a series of changes: A price negotiation model was introduced to the interbank market, with currencies more diversified and transactions expanded from spot to swap, forward, and options; Market mechanism started to play a bigger role due to the enhanced price discovery mechanism and hedge function of China’s forex market; and the exchange rate started to fluctuate within a wider band. Moreover, following the trend of the Fourth Industrial Revolution, great achievements were made in forex technology. Information technology and widespread Internet coverage accelerated the building of supporting facilities, and an e-trading system was launched, providing more convenience for investors, banks, and authorities. On January 4, 2006, the People's Bank of China further introduced the market maker system and enquiry trading system to change the pricing method of RMB middle rate, and in April 2008, the Compulsory Foreign Exchange Settlement and Sales System was put to an end.Injected dynamism gave birth to new business models. After 2005, investment using PAMM and MAM accounts were adopted in the retail forex market. In June, 2006, a Shanghai branch of China Construction bank was approved to provide individual investors with forex option products requiring margins. In September, 2006, a Hangzhou branch of the Bank of Communications launched a leveraged forex product. China had attached great importance to its market stability, making China the optimal destination for international investors in the time of adversity. In March, 2006, KVB Kunlun was authorized to set an office in Beijing. In February, 2007, Saxo Bank was awarded the license to set office in Beijing.After China survived the 2008 financial crisis, GainCapital and PFGBest started operation in China in 2011. IG Group was approved to set an office in Shanghai in 2015.The reform was an on-going journey. In October, 2014, the State Administration of Foreign Exchange announced that non-bank financial institutions, including insurance, trust, security companies as well as money brokers were authorized to trade in the interbank forex market. In 2015, China’s central bank approved the first batch of sovereign wealth fund institutes and international financial institutions outside mainland China to register in the interbank market, including Hong Kong Monetary Authority, Reserve Bank of Australia, and Phillip Securities.The 2005 reform was another stride made by China. According to a report released by SWIFT, the Chinese yuan had become the 8th-most-active currency in trade finance, exceeding Swedish krona, South Korean won, and Russian ruble by August 2013. In the first half of 2015, the value of spot transactions in China's foreign exchange market amounted to around 3.72 trillion US dollars, accounting for 50.7% in the interbank market transactions.
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