HSBC won permission from the Chinese government yesterday to quote and trade the yuan, the country's currency.
Europe's biggest bank is among the first to be granted approval from China to act as a market maker for the yuan against foreign currencies as it moves towards more market-based pricing. At present, the People's Bank of China - the central bank - facilitates all foreign exchange transactions.
HSBC, whose group chairman is Sir John Bond, said in a statement: "The launch of the market-making system will invigorate trading on the forex market and improve liquidity."
Pressure from America forced China into a modest 2.1 per cent revaluation of the yuan in July and the replacement of the system of pegging its currency to the dollar that had been in place for 11 years. The yuan is now permitted to rise or fall by 0.3 per cent against the dollar on any day.
But critics argue that the yuan remains well undervalued, leaving Chinese exports artificially cheap and contributing to a yawning trade deficit with the US that could top $200bn (about £120bn) this year.
In contrast, China is expected to post a record trade surplus of $100bn, which is sure to see foreign governments step up pressure on China to take action over its currency.
Most economists, both Chinese and foreign, agree that a revaluation of even 5 per cent would have little impact on the surplus. The central bank has ruled out another revaluation and has instead agreed to implement a gradual series of measures to give market forces greater sway over the level of the yuan.
From early next year, market makers will be able to quote and trade the yuan against the dollar, euro and yen. Prices for the dollar will remain within the 0.3 per cent daily trading range.
Last month, China's State Administration of Foreign Exchange invited banks wanting to make a market in the yuan to submit applications. Citigroup, the American financial services giant, and Bank of China are thought to have done so.
China's Big Four state lenders - Agricultural Bank of China, China Construction Bank, Bank of China, and Industrial and Commercial Bank of China - are also reportedly potential candidates.
They must meet strict criteria, including a minimum of $100m foreign currency capital, having been a member of the interbank foreign exchange market for at least two years.
HSBC shares were unchanged at 936p.Reuse content