China will speed up the development of its foreign exchange market and improve the mechanism through which the exchange rate of renminbi is determined, the State Administration of Foreign Exchange (SAFE) said Tuesday.

In an earlier speech published on the commission's website yesterday, SAFE Deputy Director Ma Delun said the Chinese Government was considering broadening the scope of forex positions commercial banks are allowed to hold when settling forex transactions as the State requires.

The commission is also considering allowing more scope for banks in quoting for forex trades and launching derivatives for forex hedging in the local market, Ma said without giving further details.

But the official reiterated the government will "maintain the fundamental stability in the renminbi exchange rate at a balanced and reasonable level."

China has been under pressure to revalue the renminbi, which some trading partners complain is undervalued.

And speculation remains unabated this year that the Chinese Government may broaden the floating range for the yuan exchange rate in the near term, although it has reiterated its stance of maintaining the fundamental stability of the renminbi exchange rate.

Ma also said the long-anticipated qualified domestic institutional investor (QDII) scheme was among reform measures his commission is considering launching in the near term.

Last month, the authorities allowed qualified domestic insurance companies to invest their forex holdings overseas, a move some analysts say is a prelude to the launch of QDII.

Ma said his commission was considering the possibility of allowing overseas institutions and companies to issue renminbi-denominated bonds in the local market or raise funds by issuing China Depository Receipts (CDRs).

China has shaken off the years-old burden of forex scarcity and is reshaping its forex management regime by strengthening the supervision of capital inflows and establishing a manageable mechanism, the official said.

China's forex reserves stood at US$470 billion at the end of June this year, equivalent to roughly the nation's total imports in a full year.

The official stressed the need to prevent the possible adverse impact of short-term capital inflows, pledging to enhance the verification of all legitimate capital inflows when they are converted at local banks under the current forex regime.

There have been worries that speculative funds have been entering China in recent months, gambling on the near-term appreciation of the renminbi.

The rapid increases in forex inflows have hampered efforts by the Chinese monetary authorities to cool monetary growth, as the central bank has to purchase excessive forex in the marketplace to enforce a narrow range for the renminbi's exchange rate.

(China Daily September 22, 2004)