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SCMP Reporter

VICE Premier Zhu Rongji's appointment as head of the People's Bank of China has propelled the yuan to some of the highest levels seen since Beijing removed the swap-rate control on June 1.

  Last Friday, the exchange rate at Qingdao swap centre hit 9.998 to the US dollar, compared with 10.968 on June 21, an increase of nine per cent.

  Other swap rates ranged between 10.30 and 10.76 over the week. It is expected that the yuan's bull run will continue in the coming few days.

  The yuan was also strong on the black market last week. It traded at 120 yuan to HK$100, compared to the average rate of 140 yuan over the past four months.

  Last week's events were due to public expectations that Beijing was determined to clamp down on the overheating economy and correct the country's disordered banking system.

  ''It is partly a psychological thing. The public believe Mr Zhu will take tough action to support the yuan,'' said a Hongkong banker in China.

  The panic selling of foreign currency by mainland trading companies also pushed up the yuan.

  It started to climb early last week on rumours that Li Guixian, the Governor of the People's Bank - the mainland's central bank - was stepping down. Mr Li officially resigned last Friday, with Mr Zhu being appointed as his replacement.

  Mr Li, who graduated from the Mentzeliev Chemical Engineering Institute in Moscow in 1965, and had had little experience in the financial industry, was blamed for China's excessive money supply and runaway inflation.

  The immediate reaction to Mr Li's resignation has been a resurgence in public confidence in Beijing's commitment towards support for the yuan.

  China presently has three kinds of exchange rates - the official rate, the swap rate and the black market rate.

  The official rate is set at 5.7 to the US dollar. The swap rate was previously set at 8.2 before being liberalised in June 1, when it immediately jumped to around 10.8.

  The black market rate is also very popular, particularly in Shenzhen, Guangzhou, Shanghai and Beijing. This rate rose from 110 yuan for HK$100 early this year to $148 two weeks ago.

  Black-market rates in northern cities are soon expected to catch up with last week's surge in the Shenzhen black market.

  ''It is quite normal for the response in northern cities to be slower,'' said a foreign banker in Beijing.

According to Hongkong Bank China Services, the yuan performed well in the Qingdao swap centre, closing at 9.988 to the US dollar - a nine per cent drop over the past 10 days.

  The rate at the Shanghai swap centre also fell to 10.344. Other swap rates stood at around 10.5. Many swap centres were not open on Friday. It is believed that the rate will continue to plunge next week.

  The black market rate also suffered a reversal last week. After trading at 140 for the past four months, it declined to 135 on Tuesday, 129 on Wednesday, 115 last Tuesday, 125 last Friday and 120 last Saturday, according to a black market trader in Shenzhen.

  Over the past few weeks, a substantial amount of foreign currency has been circulating in the swap market. It is believed that Beijing instructed many mainland trading companies to release their foreign currency in the market.

  ''Because the central government has clamped down on bank loans, many trading companies have been forced to sell their foreign currency reserves. This has resulted in a higher demand for the yuan,'' said the Hongkong banker.

  In fact, China's banking system has reached such a critical stage, that it is going to require urgent reform to avoid further catastrophe.

  The system has long been blamed for China's runaway inflation.

    Economists have suggested that the People's Bank should be run as an independent market-driven entity. They feel that the money supply could be controlled more effectively without any political interference.

  At present, the system is full of loopholes with the People's Bank being a little more than a government cashier, mechanically executing the planned orders for investment and credit.

  Although it remains to be seen if the People's Bank achieves any sort of autonomy to function as a central bank, Mr Zhu is bound to take action to put immediate controls on credit facilities and money supply.



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