Updated: 2005-06-30
Money brokers will be permitted to operate on the currency and foreign exchange markets on a trial basis for financial institutions, according to a statement released yesterday by the China Banking Regulatory Commission (CBRC).

The watchdog said the State Council has given the green light to the establishment of a money broking system, and also authorized the CBRC to put in place management regulations for money brokers, who will act as middlemen buying and selling major financial products on behalf of institutions.

Introducing money brokers for financial institutions for the first time shows the nation is taking another gradual approach to the introduction of advanced financial tools to the local market while integrating its domestic financial system with international markets little by little.

The move will help market insiders stay better in tune with fluctuations in international markets, to reduce risk, according to analysts.

"Introducing a money broking system and establishing money brokers will enhance market liquidity and improve capital efficiency in the financial markets," said the banking regulator.

"It is essential to promulgate rules for pilot money brokers."

Money brokers refer to companies that put financial institutions with money to lend from day to day in touch with other outfits wishing to borrow on agreed terms.

A money broker neither lends nor borrows, but is an intermediary receiving a commission.

It could be difficult for an institution to find a trader that fits its requirements, which is where money brokers step in.

Allowing money brokers to trade financial products such as bonds, loans and foreign exchange contracts will spur the development of markets.

Money brokers can also help reduce the trading costs incurred by financial institutions.

According to Zhang Jikang, a professor at Fudan University in Shanghai, trading costs will be lower when money brokers are used, compared to exchange transaction fees demanded by banks.

The CBRC said joint ventures will initially be allowed to be formed between qualified domestic institutions and foreign money brokers with strong reputations.

Some pilot companies will first be granted the go-ahead, and the market threshold will be gradually lifted.

"Requirements for money broking firms' experience, reputation and staff discipline are highly demanding. We have to follow prudent principles to gradually develop the industry," the CBRC stated.

Foreign money broking companies have long anticipated a policy loosening.

Some leading money brokers have had offices in China for more than ten years. Reports say such firms are keen to forge alliances with Chinese partners, although approval is pending.

ICAP, the world's largest interdealer broker, is reportedly close to securing a joint venture agreement with the China Foreign Exchange Trade System, a subsidiary of the People's Bank of China, according to the 21st Century Business Herald. The Shanghai-based exchange system is the only organization with a foreign exchange trade licence in China.

The report said Tullett Liberty is also in talks with Shanghai International Group with a view to forming an alliance.

Talks have reportedly already entered their final stages.

The CBRC also revealed yesterday the State Council has passed the nation's contingency planning guide for financial emergencies.

All related departments are urged to set up special agencies, teams and information platforms that can respond swiftly.

The banking regulator also pledged to step up efforts to study plans to set up a warning system as soon as possible to prevent the occurrence of crises.