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China discloses currency basket composition
China disclosed for the first time Wednesday the composition of the basket of currencies used to set the yuan's value, saying it mainly includes the U.S. dollar, euro, yen and Korean won, the Associated Press reported. The currencies of Singapore, Britain, Malaysia, Russia, Australia, Canada and Thailand are also considered in setting the yuan's foreign exchange rate, Zhou Xiaochuan, the central bank governor, said during a speech to launch a new operations center for the People's Bank of China in Shanghai. The news dispels at least some of the mystery surrounding the yuan's new exchange rate, although there was no information about the weightings of each currency. When China cut its currency's decade-long peg to the U.S. dollar on July 21 and allowed it to move in a restricted float, it said the yuan's exchange rate would be determined by a collection of unspecified currencies. At that time, the central bank said only that it had raised the yuan's value by about 2 percent to 8.11 yuan to the dollar from the previous rate of 8.27, and that the yuan would be allowed to move 0.3 percent in either direction each day. Since then, the yuan has appreciated slightly on Shanghai's foreign exchange market, opening at 8.1070 yuan to the dollar Wednesday. China's central bank also said Wednesday that it will tighten oversight of the country's foreign exchange markets while moving to liberalize its currency trading regime. The statement came a day after it announced Beijing was expanding the country's foreign-exchange forwards business and launching currency swaps. On Wednesday, the bank said it was also allowing nonbanking firms to trade in its onshore foreign exchange market and was launching foreign-exchange forwards on the domestic interbank market. While widening currency trading onshore, the bank said it would strengthen its oversight and management of the market "to guarantee stable, orderly market operations and maintain the basic stability of the yuan exchange rate at a reasonable, balanced level." The central bank said the new rules allowing broader use of foreign exchange derivatives were aimed at meeting the need to hedge foreign exchange risk following the July 21 revaluation. "The timing and conditions are ripe for expanding the forex forwards business and launching the swaps business," the People's Bank of China said in a statement. China began allowing some banks to offer yuan-foreign currency forwards to their clients beginning in 1997 as part of a pilot program. Up to now, only four major state-owned banks and three stockholding commercial banks have participated in the program, the central bank said. The new rules allow all domestic banks to seek approval for conducting forwards trading. Financial institutions given that approval will be qualified six months later to begin swaps business. The new rules also expand the range of forwards trading allowed. However, the central bank said swaps of the yuan against foreign currencies couldn't involve the exchange of interest rates, implying the transactions wouldn't leave loopholes for trading of interest rate swaps. Foreign banks also will be allowed to provide the derivative products to their clients.
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