BEIJING, Sept. 27 -- The People's Bank of China may name banks including HSBC Holdings Plc., Citigroup Inc. and Bank of China as market makers in the yuan, a step toward a freely traded currency, bankers and traders familiar with the situation said.

    Market makers may be able to quote and trade the yuan against the dollar, euro and yen by the year end, ending the central bank's monopoly on setting interbank exchange rates, said the people, who declined to be named. Prices for the dollar will still have to be within 0.3 percent of a daily rate set by the central bank, which July 21 allowed the yuan to appreciate for the first time in a decade, they said.

    United States, Japanese and European governments are pressing China to allow its currency to gain, asserting the yuan is undervalued and gives the nation's companies an unfair trade advantage. China's US$10 billion trade surplus in July was the third highest on record. The People's Bank of China is moving toward market-based pricing for its currency, a step closer to ending its role as the sole counterpart in all foreign-exchange deals.

    "As soon as we have market makers, banks will be given freedom to price dollars against yuan," said Stephen Green, an economist in Shanghai at Standard Chartered Plc. "They would definitely create a market. We expect the margin in which the yuan is traded will widen."

    Being a market maker may give the banks an inside track when China allows the yuan to trade more freely in the US$1.9 trillion-a- day market for foreign exchange. China's currency reserves rose to US$740 billion in July from US$483 billion a year earlier as it bought dollars to maintain the yuan's peg. The nation's economy expanded at a 9.5 percent pace in the second quarter.

    Central bank officials met with representatives from seven local lenders to discuss naming market makers, said people who attended the meetings. Three foreign banks, Citigroup, the world's largest financial institution, HSBC and Deutsche Bank AG, the largest currency trading bank, were invited to a separate meeting, said a person who attended the session.

    Dandan Chang, a spokeswoman for HSBC in Shanghai, declined to comment, as did Stephen Thomas, a spokesman for Citigroup in Shanghai, and Sauw Yim, a spokeswoman for Deutsche Bank in Hong Kong. Central bank officials didn't respond to two faxes from Bloomberg seeking comment.

    Since the July revaluation, China relaxed limits on the amount of foreign currency banks can hold and increased the quantity of yuan individuals can sell, steps toward developing the foreign-exchange market. The yuan is a denomination of China's currency, the renminbi.

    Chinese authorities said they plan to give market forces a bigger role in setting the yuan's value. The central bank will widen the currency's daily trading range once the foreign-exchange market expands, deputy governor Ma Delun told the World Economic Forum in Beijing on Sept. 9.

    Adding market markers doesn't mean China will surrender its dominance over currency exchange rates, said Craig Chan, a currency strategist at Royal Bank of Scotland Group Plc. in Hong Kong. "After banks apply for their license, the trading limit per day will be tiny," he said.

    China ended the yuan's peg to the dollar by allowing it to appreciate by 2.1 percent and linking it to a basket of currencies. The central bank on Sept. 23 widened the trading range for the yen and euro to 3 percent from 1.5 percent. Investors that day raised bets on another increase in the currency's value, with Hong Kong-traded yuan forward contracts reaching a one-month high.

    The contracts allow investors to make wagers on the value of China's currency for a later specified time and date, and are non- deliverable because they are settled in dollars, not yuan.

    In China, the yuan's biggest one-day fluctuation against the dollar since the currency-basket system was introduced is less than 0.1 percent. The yuan has gained 0.2 percent versus the dollar since the revaluation.

    The central bank's plan also allows commercial banks in China to hold dollars overnight, said the people who attended both meetings. Currently, banks must sell any dollars they have at the end of the day to the central bank at the official closing rate.

    This "will bring fundamental changes to the trading of yuan, making the currency market liquid, efficient and complete," said Li Huiyong, a Shanghai-based economist at Shenyin & Wanguo Securities Co., China's biggest brokerage. "A market with the central bank acting as the only price-setting and foreign-exchange settling institution is distorted."

    The central bank said last month that it will let more than 130 domestic and foreign banks including Citigroup and HSBC, which began doing business in China in 1865, to trade yuan forward contracts and swaps on behalf of clients.

    Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. They will allow local companies and investors to protect themselves from swings in the yuan and other currencies.

    The local banks that met with the central bank were Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, Bank of Communications Co., China Merchants Bank Co. and CITIC Industrial Bank, the people said.

    Wang Zhenning, a spokesman for Industrial and Commercial Bank, said he was unaware of the meetings, as did Bank of China spokesman Wang Zhaowen. Agricultural Bank spokeswoman Li Jiayin, Bank of Communications spokesman Song Feng, CITIC Industrial Bank spokesman Jin Lei, China Merchants Bank Board Secretary Lan Qi, and Construction Bank spokesman Yu Baoyue also said they had no knowledge of the discussions.

    One-year yuan forward contracts traded in Hong Kong on Sept. 23 rose to as much as 7.8138 per dollar, a one-month high and a gain of 3.4 percent.

(Source: Shenzhen Daily/Agencies)