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Reforms in the china Exchange Rate Regime


China has allowed a 2 per cent appreciation of its currency, ending a decade-old fixed peg to the US dollar. China’s central bank on 21st July 2005, announced a mild appreciation of the yuan -- also known as the renminbi, setting the peg at 8.11 to the dollar from the long-standing level of 8.28. Now renminbi would now be pegged to a basket of currencies.

Under the new system, the basket of currencies used to set the value of the yuan would be known to only Chinese authorities, though it is widely expected to include the euro and the Japanese yen.

The Yuan revaluation is definitely good news for India and the foreign flows will accelerate. The commodity market and old economy stocks will benefit from it. However, sentiments may dampen for IT stocks as the rupee may strengthen further. According to Foreign exchange dealers rupee may now even breach the 43-to-the-dollar.

US Federal Reserve Chairman Alan Greenspan called it "a good first step", while adding that further adjustments would be necessary.

Announcement of the People's Bank of China on Reforming the RMB Exchange Rate Regime

With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People's Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime:

1. Starting from July 21, 2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility.

2. The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day.

3. The exchange rate of the US dollar against the RMB will be adjusted to 8.11 yuan per US dollar at the time of 19:00 hours of July 21, 2005. The foreign exchange designated banks may since adjust quotations of foreign currencies to their customers.

4. The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will continue to be allowed to float within a band of +/- 0.3% around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.

The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies. The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.

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