Laws of the People's Republic of China

People's Bank of China

Announcement of the People's Bank of China on Improving the Inter-bank Spot Foreign Exchange Market

Announcement [2006] No.1 of the People's Bank of China

For the purpose of improving the managed floating exchange rate system on the basis of market supply and demand with reference to a basket of currencies to make adjustment, promoting the development of the foreign exchange market, diversifying the mode of foreign exchange transactions, and enhancing the independent pricing capability of the financial institutions, the People's Bank of China determines to further perfect inter-bank spot foreign exchange market, and improve the formation mechanism of the central parity of RMB exchange rate, and hereby make the announcement on relevant issues concerned as follows:

I.

Since January 4, 2006, over-the-counter transactions (hereinafter referred to as the OTC transactions) will be brought into the inter-bank spot foreign exchange market , and the way of negotiation shall be kept down at the same time. Participants in the inter-bank foreign exchange market may engage in foreign exchange transactions either based on centralized credit authorization and price bidding, or engage in OTC transactions based on bilateral credit authorization and bilateral settlement. At the same time the system of market makers shall be introduced into the inter-bank foreign exchange market for providing the liquidity for the market.

II.

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

III.

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

IV.

The central parity of exchange rate of RMB against euro, Japanese yen and Hong Kong dollar shall be calculated and confirmed by the China Foreign Exchange Trade System in the light of the RMB-US dollar central parity of exchange rate 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 this 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 foreign exchange 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 foreign exchange market shall float within a range of 0.3% around the central parity of the US dollar transaction 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 transaction 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 of transaction announced by the China Foreign Exchange Trade System, that is the difference between the selling price and the buying price of the currency exchange does not exceed 1% of the central parity of transaction of the current day, and the band formed by the selling price and the buying price contains the central parity of transaction of the current day. And the difference between the selling price and the buying price of the US dollar cash by a bank to its clients shall not exceed 4% of the central parity transaction. Within the prescribed extent of price difference, the banks may adjust the listed US dollar exchange rate of the current day by themselves.

In accordance with the economic and financial situations both home and abroad, the People's Bank of China shall take charge of managing and adjusting the RMB exchange rate 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 basically, and maintaining the stability of macro economy and financial market.

People's Bank of China

January 3, 2006