China has approved its first batch¹ of market makers² for the trading of renminbi as part of further steps to make the exchange rate mechanism³ market-driven.

    Citigroup Inc and Standard Chartered Plc are among those receiving approval by the State Administration of Foreign Exchange (SAFE), China's foreign exchange regulator, Bloomberg News reported on Friday.

    China's four State-owned commercial banks are in the initial batch, sources said. Market-makers may be able to quote and trade the yuan against the dollar, euro and yen⁴.

    A SAFE spokesman declined to comment on the news.

    Senior SAFE officials said earlier this year that they hoped market makers for trading between the local currency and the US dollar would be launched before the end of this year to help make the renminbi exchange rate forming mechanism more market-driven.

    "Now market mechanisms⁵ will play a bigger role in forming the renminbi exchange rate," said a trader with one of the four State-owned banks. "With more banks providing liquidity⁶, trading will become more active and there will likely be great price fluctuations⁷."

    China reformed its decade-old exchange rate policy on July 21, allowing the yuan to appreciate by 2 per cent against the US dollar and linking the currency to a basket of foreign currencies instead of the US dollar alone.

    Expectations for further appreciation⁸ of renminbi remain in the marketplace, as trading partners continued to push for a stronger yuan and complained about narrower-than-expected price fluctuations.

    The introduction of market makers in transactions between renminbi and foreign currencies will likely broaden the fluctuations, but "it will only be seen after the system has worked for some time," the trader said.

    China's four State-owned commercial banks, such as the Hong Kong-listed China Construction Bank, are still the biggest traders of yuan in the market after the People's Bank of China (PBOC), the central bank.

    But foreign banks will play a bigger role in the future. "It will enable us to fully⁹ participate in the development of the foreign exchange market, while providing more flexibility¹⁰ for our clients," Richard Stanley, Citigroup's China chief executive officer, said in a statement. "We believe this is another important step for the advancement¹¹ of China's currency market."

    The introduction of more market makers, which are expected to provide liquidity by quoting both selling and buying prices, will also help reduce the burden on the central bank to absorb excess dollars in the market.

    The PBOC enforces the trading band of renminbi by buying the excess dollars in the market with local currency. Its purchases of dollars are added to a growing stockpile of foreign exchange reserves, while the local money it uses injects new liquidity into the banking¹² system.

    With China's foreign trade continuing to see huge surpluses and expectations for a renminbi appreciation remaining strong, heavy inflows of dollars have fuelled the growth of local money supply to unhelpfully fast rates

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