China hits the right note on free currency
EDITORS LETTER
This mindset has led to the perception of an incredibly slow approach to the adoption of a fully free currency trading regime in the region. However, the reality is that the government has chosen a sensible middle path to introducing a flexible exchange rate and facilitating trading.
The story on the facing page is a good example of the pragmatic approach to adopting standards that the country is taking. The agreement for cross-currency swaps and forwards was made only after sending out two possible drafts to domestic and international banks. The central bank went with the more international International Swaps and Derivatives Association agreement after the majority of those who were consulted backed this, rather than a more localised option.
Elsewhere, the authorities decided to invite the Commodity Futures Trading Commission to help them form regulations to take best practice from one of the most developed markets. The joint venture between Cfets and Icap is an example of how China is looking to establish fruitful partnerships between Western companies and internal, state-sponsored infrastructure.
These initiatives show that while the Chinese authorities are by no means rushing headlong into a free currency market, they are definitely moving in that general direction at a reasonable pace. Banks' foreign exchange desks should be pleased that China is taking this balanced approach. If it said tomorrow that the renminbi would be freely traded, there would be chaos. There might be huge flows initially but they would soon dry up as the infrastructure disintegrated under the pressure that the huge volumes would create.
More fundamentally, the Chinese economy as a whole could suffer as a rapidly fluctuating currency could damage companies that are used to knowing exactly what they will receive for orders made by overseas companies. This could lead to discontent at home, which could ultimately persuade the government to retreat into its shell, putting the whole process back years, if not decades.
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