Since the July 2005 reform of the mechanism for setting the Renminbi exchange rate in July 2005, there have been increasing varieties of trading products on the Chinese foreign exchange market. The country has witnessed steady development of Renminbi-against-forex forwards and foreign exchange swaps on the market where banks provide services to their clients and on the inter-bank foreign exchange market. In August 2007, Renminbi-against-forex currency swaps were introduced into the inter-bank foreign exchange market. In order to further satisfy the requirements of market entities for hedging exchange-rate risks and to promote the development of the foreign exchange market, the State Administration of Foreign Exchange recently promulgated the Circular on Issues Concerning Foreign Exchange Administration for Renminbi-Against-Forex Currency Swaps Provided by Designated Foreign Exchange Banks to Their Clients (hereinafter referred to as the Circular), indicating the introduction of Renminbi-against-forex currency swaps into the market where banks provide services to their clients. The Circular will enter into force as of March 1, 2011.

The Circular mainly covers three issues: (1) simplifying administration of market admittance. Banks that have acquired one-year qualifications for handling Renminbi-against-forex swaps for clients are allowed to provide currency swaps to their clients without having to receive approval from the SAFE; (2) facilitating market transactions. Transaction elements such as currencies and terms in the currency swaps provided by the banks to their clients will be determined at the discretion of the banks; (3) interest rates in currency swaps will be determined by both parties to the contract through negotiations, and shall comply with the regulations of the Peoples Bank of China on the administration of deposit and lending rates.

Promulgation of the Circular will provide more opportunities for enterprises to select instruments to hedge risks caused by exchange rates and interest rates, and will play a positive role in promoting the development of Chinas foreign exchange market and enhancing the risk-hedging awareness and capability of enterprises.