China revalued the yuan 2.1% and replaced the decade-old peg to the dollar with a managed float against a basket of currencies. These land-mark measures are just two among many that must be implemented before China can adequately handle the volatility of the international foreign exchange system. Earlier, Reuters provided a key building block to advancing China's foreign exchange framework, launching a system that allowed banks to trade in non-RMB currency pairs. In a conversation with CHINA ECONOMIC REVIEW, Asoka Markandu, Business Manager for Reuters' Automated Dealing Technologies, discussed the importance of this new technology.
Q: What is the new system to be used with China Foreign Exchange Trading System (CFETS)?
A: Reuters has deployed at CFETS a state-of-the-art, real-time multi-bank portal to be used by its  member banks. The platform includes a customized price feed server application that will enable CFETS to receive executable prices from selected Liquidity Provider banks for selected non-RMB currency pairs. One of the key attributes of the CFETS portal is its decision to adopt a centralized counter party model so as to encourage greater transparency, better pricing and increased trading amongst local domestic banks.
Q: How was foreign exchange traded in China before the implementation of this multi-bank portal?
A: CFETS developed its own inter-bank dealing system about 10 years ago and it currently trades in 4 RMB currency pairs only. They include the RMB against the JPY, USD, EUR & HKD. The technology that was used to develop the system needs to be upgraded and is costly to maintain and support. Nevertheless, as the only domestic inter-bank (RMB) trading platform in China today, it has proven to be extremely successful for CFETS. The interbank foreign exchange market turnover grew from US$40.8bn in 1994 to hit a record high of US$151.1bn by the end 2003.
Q: What currency pairs are traded on the new system?
A: CFETS currently offers trading in 8 non-RMB currency pairs on the multi-bank portal. These include the US dollar against the Euro, Yen, Hong Kong dollar, Sterling, Swiss franc, Australian dollar and Canadian dollar, plus the Euro versus the Yen. The system can be easily extended to include additional currency pairs.
Q: How many Liquidity Providers (or market makers) are live on the system today?
A: This trading platform will provide CFETS member banks (generally price takers) with access to liquidity from 10 leading financial institutions. These include ABN AMRO, Bank of China, Bank of Montreal, Citibank, CITIC, Deutsche Bank, HSBC, ING, ICBC, Royal Bank of Scotland.
Q: How is this initiative linked to Chinese currency reform?
A: By allowing Chinese banks to gain experience trading currencies other than the yuan, the Chinese government is preparing its banking community for a more flexible, market-based currency environment. China wants to ensure that its banking sector, which has been burdened by bad debts and has relatively little risk management experience, will be able to adjust to whatever currency reforms it pursues.