Although the Chinese government has long been characterized as a restrictive regime, the country's State Administration for Foreign Exchange (SAFE) has just announced that as of June 11, 2012 Chinese financial institutions will be permitted to carry out Forex swaps without exchanging principal, as was required since 2007. Eliminating this requirement to swap the principal in Forex trades will lower the cost of each transaction which should hopefully increase the overall volume of trades and open up the foreign exchange market to an entirely new market.
Until now, currency trading took place in China mostly by banks that needed to make an exchange. The new allowance of currency swaps, however, should entice other financial institutions to speculate on the interest and exchange rates and to get involved in the Forex market in new ways.
In conjunction with the new allowance of currency swaps, the SAFE also announced its intention to simplify the registration process for those financial entities that are interested in taking advantage of the new swap policy. Though it will likely take several months (if not longer) to see how these new policies will truly affect the volume of currencies being traded in China, the potential for the long-term advancement of China's Forex market is evident, and should be watched closely.