China to Open Yuan To Spot Forex Trading By RICK CAREW and ZHENG XIAOLU DOW JONES NEWSWIRES January 3, 2006 9:56 a.m. BEIJING -- China will allow the yuan to be traded over the counter for interbank spot forex trading starting Wednesday, the country's central bank said Tuesday. China will publish yuan benchmark rates each trading day versus the U.S. dollar, euro, Japanese yen, and Hong Kong dollar, the People's Bank of China said in a statement on its Web site. The new trading system is another step toward giving market forces a larger role in determining the value of the yuan, and making the market for the currency more flexible. The new rules will allow spot market participants to make bilateral currency trades on credit in addition to the automatic price-matching system currently in place, the PBOC said. It said the yuan's trading band will remain the same versus the U.S. dollar, the euro, Japanese yen, and Hong Kong dollar. Currently, the Chinese yuan's daily trading band is 0.3% versus the benchmark central parity rate of the U.S. dollar and 3% versus nondollar currencies. The PBOC will set the daily benchmark central parity rate for the yuan versus the U.S. dollar by calculating a weighted average of the prices given by market makers. The highest and lowest offers will be excluded from the calculation, the PBOC said. The weight will be decided by indicators including bidders' trading volumes and bidding prices on the interbank forex market, it said. The benchmark central parity rate for the euro, Japanese yen, and Hong Kong dollar currency pairs will be set based on the yuan-U.S. dollar benchmark rate, as well as the non-dollar currencies' exchange rates with the U.S. dollar on the international markets at 0900 Beijing time each working day. China's State Administration of Foreign Exchange has approved 13 local and foreign banks to become yuan foreign-exchange market markers, banking sources said Friday. The PBOC introduced OTC trading in the interbank forward market in August. "In the four months since then, the forward market has functioned smoothly," it said. On July 21, China revalued the yuan by 2.1% versus the U.S. dollar and began referencing the value of the currency to a basket of currencies. Since then, the PBOC has published closing exchange rates each day. Under the new system, the closing price determined by automatic price matching won't be representative as a price indicator anymore because it won't take into account over-the-counter trades, the PBOC said. "China will continue to coordinate macroeconomic policies and steadily advance the reforms of various sectors so as to provide a favorable policy environment for [yuan] exchange rate stability," the statement said. "Large fluctuations in the [yuan] exchange rate will adversely affect China's economic and financial stability and undermine China's fundamental interests," the PBOC said. The new system will provide price feedback in the foreign-exchange market, and encourage financial firms to better manage risks, the PBOC said. Dollar Is Broadly Lower The dollar was lower in trading Tuesday, as investors kicked off the year by selling the U.S. currency ahead of the afternoon publication of the Dec. 13 Federal Open Market Committee minutes. The market expects the FOMC minutes to show the policy makers are becoming increasingly sensitive to U.S. data in its decisions and that the end of tightening is nearer. An eventual end to rate hikes would take away the main prop of dollar strength during 2005. In New York, the euro was at $1.1874 from $1.1828 late Friday. The dollar was at 117.50 yen from 118.01 yen, and at 1.3088 Swiss francs from 1.3154 francs. The pound was at $1.7266 from $1.7179, and the euro was at 139.52 yen from 139.55 yen. With Japanese markets closed, trading was choppy overnight with modest-size bids able to draw sizable shifts in spot values. The dollar briefly traded under 117 yen and the euro lifted over $1.19 at one point, helped by strong regional manufacturing data. However, the dollar later recouped those losses. ----Laurence Norman Copyright 2006 Dow Jones & Company, Inc. All Rights Reserved