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	ANNOUNCEMENT OF THE PEOPLE'S BANK OF CHINA ON IMPROVING THE INTER-BANK SPOT FOREX MARKET

	((Announcement No.1 [2006] of the People's Bank of China), January 3, 2006)


SUBJECT : INTER-BANK SPOT FOREX MARKET
ISSUING DEPARTMENT : PEOPLE'S BANK OF CHINA
ISSUE DATE : 01/03/2006
IMPLEMENT DATE : 01/04/2006
LENGTH : 836 words
TEXT :

With a view to improving the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies, promoting the development of the foreign exchange market, diversifying the mode of foreign exchange transactions, and strengthening the independent pricing capability of the financial institutions, the People's Bank of China determines to perfect inter-bank spot forex market, and improve the formation mechanism of the central parity of RMB exchange rate, and hereby make the following announcement on relevant issues concerned:

I. Over-the-counter transactions (hereinafter referred to as the OTC transactions) will be introduced into the inter-bank spot forex market starting from January 4, 2006, and the way of negotiation shall be preserved at the same time. Participants in the inter-bank forex market may engage in forex transactions either based on centralized credit authorization and price bidding, or engage in OTC transactions based on bilateral credit authorization and settlement. The system of market makers that are obliged to quote both selling and buying prices are introduced at the same time to provide liquidity for the market.

II. Starting from January 4, 2006, the People's Bank of China will authorize the China Foreign Exchange Trade System to announce at 9:15 AM on each workday the central parity of the RMB against US dollar, euro, Japanese yen and Hong Kong dollar of the current day, which shall be regarded as the central parity of the foreign exchange rate of the inter-bank spot forex market (including OTC transactions and negotiation) and the OTC transactions of the banks in the current day.

III. After OTC transactions is introduced, the formation mechanism of the central parity of RMB against US dollars, which was based on the closing quotation of a bank in a negotiation in the inter-bank forex market before, will now be decided as follows: the China Foreign Exchange Trade System makes offers to all market markers in the inter-bank forex market before the opening of the inter-bank forex market every day, and the quotations of all market makers shall be taken as the samples for computation of the central parity of the exchange rate of RMB against US dollar, the current day of which will be decided on the weighted average of prices from all market makers, after excluding the highest and lowest quotations, and the weight shall be determined comprehensively by the China Foreign Exchange Trade System on the basis of the volume of transactions of the party that quotes in the inter-bank forex market and the quotation conditions and other indexes.

IV. The central parity of RMB against euro, Japanese yen and Hong Kong dollar shall be determined by the China Foreign Exchange Trade System on the basis of the RMB-US dollar central parity on the current day and the exchange rate of those currencies against US dollar in the international market at 9 o'clock AM.

V. After the present Announcement is promulgated, the existing provisions shall still be followed for the band of fluctuation of RMB against US dollar and other currencies in the inter-bank spot forex market and the spread of US dollar exchange rate quotation of the banks to their clients. Namely, the daily trading price of the US dollar against RMB in the inter-bank spot forex market shall float within a range of 0.3% around the central parity of the US dollar announced by the China Foreign Exchange Trade System, while the trading price of such non-US dollar currencies as euro, Japanese yen and Hong Kong dollar against RMB shall float within a range of 3% around the central parity of the non-US dollar currencies announced by the China Foreign Exchange Trade System. The maximum buying and selling spread of the US exchange rate quotation of a bank to its clients shall not exceed the asymmetric management of 1% of the central parity announced by the China Foreign Exchange Trade System, as long as the difference between the selling price and the buying price of the foreign exchange does not exceed 1% of the central parity of the current day, and the band formed by the selling price and the buying price contains the central parity of the current day; and the difference between the selling price and the buying price of the US dollar cash of a bank to its clients shall not exceed 4% of the central parity. The banks may adjust by themselves the US dollar exchange rate quotation of the current day within the prescribed range of spread.

The People's Bank of China shall be responsible for managing and adjusting the RMB exchange rate according to the economic and financial situations both home and abroad, based on the market supply and demand with reference to the fluctuation of exchange rate of a basket of currencies, maintaining the normal fluctuation of the RMB exchange rate, and keeping the RMB exchange rate to be basically stable on a reasonable and balance level, promoting the balance of international payment, and maintaining the stability of macro economy and financial market.