China plans to introduce a market-making trading system for its national currency as early as next week, apparently to allow the yuan to float freely against foreign currencies.

HSBC, Europe’s largest bank, said in a statement: "The launch of the market-making system will invigorate trading on the forex market and improve liquidity."

Other banks approved by Chinese officials include Citigroup, ABN Amro and Standard Chartered.

“It will enable us to fully participate in the development of the foreign exchange market, while providing more flexibility for our clients,” said Richard Stanley, chief executive of Citigroup China.

The launch of a market-making system for the yuan is part of a series of economic and currency trading reforms to have taken place over 2005. Other reforms have included the creation of a commercial paper market to allow currency swaps and forwards on inter-bank markets.

The yuan was re-valued by 2.1 per cent in July following the decision of the central bank to replace its 11 year dollar peg with a system that should allow the currency to revalue by a maximum of 0.3 per cent in a single day.

Critics consider the yuan to be undervalued, forcing Chinese exports to appear artificially cheap and contribution to an annual US trade deficit of $200 billion.

It is also reported in the Chinese media that a Citigroup-led consortium, have made a 24.1 billion yuan (£1.7 billion) bid for a 85 per cent stake in the Guangdong Development Bank. If the transaction is completed, Citigroup would become the first foreign company to successfully purchase a controlling stake in a state-run Chinese bank.

China became obliged to open its banking sector to foreign competition because of its admission to the World Trade Organisation.

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