SAFE lowers market maker requirements

China's State Administration of Foreign Exchange (SAFE), the country's foreign exchange regulator, announced on its website Wednesday that it has eased requirements for financial institutions looking to provide market making services in the inter-bank foreign exchange market, a move which the administration says will energize the local currency trade.

By expanding market access, regulators aim to promote the trading of the yuan and give the market a greater say in the currency's value, experts told the Global Times.

Specifically, the SAFE will be canceling requirements issued on December 30, 2012, which stipulated that firms and institutions had to maintain a capital-to-risk weighted asset ratio of above 8 percent for at least one year before they could apply to quote buying and selling prices on their currency inventories in the foreign exchange money market.

The administration also relaxed earlier requirements on the scale of applicant's foreign exchange trade in the retail market.

Since the Bank of China became the first market maker in China's inter-bank market in 2005, fewer than 20 financial institutions and enterprises - including the country's Big Four commercial lenders as well as overseas peers such as HSBC - have come forward to offer foreign currency trading services of their own, Liu Dongliang, a senior currency analyst at China Merchants Bank Co in Shenzhen, told the Global Times.

"That is a pretty low number when you look at the size of the country's currency market," Liu said.

But now that overseas investors have greater incentives to trade the yuan while other foreign currencies underperform, transaction volumes in the inter-bank foreign exchange market have picked up considerably, a development which has inevitably created a need for more market makers to handle the growing demand, Liu continued.

Turnover on currency trading in China's money market stacked up to $14.2 trillion in 2011, some four times higher than the volume recorded in 2006, according to SAFE statistics.

China's foreign exchange reserves also grew by $128 billion over the first three months of this year, the largest increase since the second quarter of 2011, official data show. The recent jump is at least a partial indicator that overseas investors are retaining their enthusiasm for the yuan trade.

Nie Riming, a research fellow at the Shanghai Institute of Finance and Law, also explained that the involvement of more parties in the pricing of the yuan will expose the currency to more pressure from the market and further the government's plans of liberalizing the yuan, which also include the gradual widening of the yuan's trading band.

The central bank in April, 2012 expanded the yuan's trading band from 0.5 percent to 1 percent on either side of a daily reference rate.