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China reforms forex trading system
Updated: 2005-05-18 14:38

China launched a new foreign exchange dealing system on Wednesday that allows domestic trading in currencies other than the yuan, a milestone in the country's effort to reform its tightly controlled currency regime, Reuters reported.

The People’s Bank of China, the central bank, said in its website Tuesday afternoon that it has decided to push forward the new system, allowing trade in eight more currency pairs.

Economists say the new trading platform -- which does not involve yuan trading -- is itself a step toward a more flexible yuan.

The China Foreign Exchange Trade System's (CFETS) new platform hosts trading in the U.S. dollar against the euro, yen , Hong Kong dollar , British pound , Swiss franc , Australian dollar and Canadian dollar, plus the euro versus the yen .

Officials have assembled a line-up of foreign and local banks to launch the system, from ABN AMRO to Bank of China, but economists are divided as to whether the market will attract the business it needs to take off long-term, Reuters reported.

Some analysts say trade will be lively so long as the opportunity exists to earn a profit, but others say the system may be constrained by a lack of foreign participation.

Bankers said a number of trades had gone through the system within minutes of its launch.

"Our aim was just to test the waters, and try and grab a leading position in this," a Beijing-based bank dealer told Reuters shortly after the system went live. "We don't know whether we can make any money though."

Financial markets had looked to the launch of the new system as a time when Beijing might be preparing to make a long-anticipated move to revalue yuan.

Beijing has vowed to free up the yuan according to its own timetable and has said reform of its banking system -- sagging under more than $200 billion in bad loans and one of the weakest links in its economy -- is a key prerequisite.

China's new currency trading system is partly aimed at preparing its banking community for a more flexible, market-based environment, by allowing homegrown lenders to gain experience trading currencies other than the yuan.

"We believe that in due course the system will develop further, including forward contracts and other Asian currencies," Alistair Reid, ING's head of financial markets sales for Asia, said in a statement.

Shanghai Securities and Futures Institute economist Jin Dehuan said in the longer term the system would help China find more effective ways to determine the yuan exchange rate.

It offers an example that regulators can draw on before breaking the yuan's dollar peg.

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