Fact Sheet: Chinese Actions on Exchange Rate Flexibility, Financial Sector Reform and Ba

Foreign Exchange Policy and FX Market and Financial Product Development: 

Foreign exchang

financial instruments for managing and hedging foreign exchange risk are critical elements of a market-based flexible exch

 - June: Regulators allow foreign 

banks to offer foreign exchange (FX) products - June: Chinese begin work with the Chicago Mercantile Exchange to offer FX futures in China. - October: Chinese announce plan to introduce Reuters-based onshore non-renminbi FX trading platform. - October: Central bank lifts ceiling on bank lending rates. 

- May: Banks allowed to trade non-RMB spot currency pairs in China on Reuters system; Chinese banks can act as market makers. - July: China abandons RMB peg, adopts managed float. - August: China introduces interbank forward FX market. - August: New measures expand ability of institutions to trade and hedge FX risk.1

- September: daily band for RMB spot against non-USD currencies widened to 3%. - November: Central bank does FX swap with local banks. 

- January: interbank t(spot) delivas FX mar- Februaryswap. - March: Callow electand interesChinese fininvestors. 

Liberalization of Capital Flows: An important part of China’s strategy to prepare for a market-based exchange r

flow transactions in order to increase the depth and liquidity of foreign exchange markets, making them more efficient at tra

- Chinese authorities introduce measures that promote FDI and other capital flows. - Qualified Foreign Institutional Investor (QFII) program launched2

- July-August: Select Chinese domestic institutional investors (QDII) authorized to invest in overseas assets. - Nov/Dec: limits raised on amounts emigrants, travelers, and students can take out of China. 

- February: Eliminated surrender requirements on certain commercial firms’ FX receipts. - June: Raised quota for QFIIs from $4 billion to $10 billion. 

- April: Libeallowing Cto buy mor

- April: 54 fbanks opeto trade FX 

1 Aug-2005: Expanded participants in FX forwards market and allowable transaction coverage, reduced maturity restrictions, and allow

to quote prices; launched onshore RMB-foreign currency swaps in interbank market; allowed qualified non-bank entities to access FX s

2 QFII: Qualified Foreign Institutional Investor – a foreign entity allowed to invest up to a certain quota amount in China’s domestic ca3 April-2006: Individuals can convert more RMB to take out of China, commercial banks can buy foreign bonds; securities firms can bu

2003 2004 2005 
Fact Sheet: Chinese Actions on Exchange Rate Flexibility, Financial Sector Reform and Ba

Financial Sector Reform: a well-supervised, well-capitalized, well-managed banking system will help ensure that rem

capital flows and interest rates is done in a manner that safeguards financial stability. Letting market forces play a greater rinterest rates is a crucial component of a more market-based exchange rate regime. Liberalizing equity markets can also e- December: $45 billion recapitalization of two of the four large state-owned banks, after their sell-off of non-performing loans to state-owned asset management companies. - December: Foreign banks allowed greater renminbi business and larger stakes in joint ventures. - 2003: Foreign investment in Chinese banks accelerates.4

- 1Q: Bank regulator imposes tighter capital adequacy requirements and stricter loan classification. - September: lowered restrictions on foreign bank entry and branching. - October: Ceiling on bank lending lifted giving banks greater scope to price loan risk. 

- April: $15 billion recapitalization of ICBC (3rd of 4 large stateowned banks). 

- April: regulators launch program to convert non-tradable listed company shares to tradable shares. - October: Regulators approve RMB-denominated bond issue by Asian Development Bank and IFC. - November: Limited foreign strategic investments in listed domestic companies allowed. - 2005:2 of five largest state banks conduct successful overseas IPOs 

- January: nationwide bureau. - April/Mayprogram. 

2006 – Boosting Domestic Demand: China’s growth strategy as laid out in the recent 11th Five-Year Plan emphas

particularly consumption, with a strong focus on rural economic development and expanding social services such as educa

Measures taken since 2003 to expand domestic demand: 3⁄4 Reduce Taxes: Doubled threshold income level for personal income tax (2005); Abolished agricultural tax (2006) 

3⁄4 Increase Household Income: established minimum wage system to raise wages and increase income of lower incom

3⁄4 Develop Rural Areas: Increased central government funding to support lower taxes and fees in rural China and to 

supply drinking water, conventional electricity and hydropower, and roads in rural areas. 

3⁄4 Encourage Consumer Credit: Encourage financial institutions to lend to households; increase residential mortgage a

4 Examples of Foreign Investment in China’s Financial Sector: Citibank acquires stake in Shanghai Pudong Development Bank (Jan-20

acquired small stake in China Minsheng Bank (March-2004) and 18% stake in Shenzhen Development Bank (May-2004); Goldman SaJV securities firm (Sept-2004); Bank of America acquires 9% stake in China Construction Bank (Oct-2005); Merrill Lynch and others China (Aug-2005); Goldman Sachs, American Express and others acquire stake in ICBC (Jan-2006). 

5 Both GM and Ford have established auto finance companies in China (in addition to several foreign auto companies).

2003 2004 2005