China Thursday added two foreign and four local banks to its list of approved market makers for the yuan in its latest step to develop a more sophisticated domestic currency market, a condition the central bank has said is necessary before it can give the yuan greater flexibility.

"The introduction of more market makers in the yuan market will help activate trading and ensure prices better reflect real market demand and supply," a Shenzhen-based currency trader said Thursday.

The State Administration of Foreign Exchange, an organ under the central bank, said in a statement on its Web site the six new banks bring the total number of market makers to 21, eight of which are foreign banks and 13 Chinese banks.

China's central bank introduced a market maker system on the first day of trading this year, appointing five foreign and eight domestic banks as the first batch of market makers. Beijing pegged the yuan to the U.S. dollar until July 2005, when it moved to a managed floating exchange rate regime.

Market makers are obliged to quote bid and offer rates to provide greater liquidity to the market and help make foreign-exchange trading more active.

China's central bank has repeatedly said it wants to create a more market-oriented foreign exchange system.

Although the central bank has allowed more volatility in currency trading in recent weeks, China's foreign exchange market continues to be dominated by the central bank, which acts through large state banks to influence dealings. Beijing also keeps a tight grip on non-trade capital flows and the central bank has stepped up efforts this year to prevent hot-money inflows into the country.

Further reforms of China's exchange rate regime will be a key topic under discussion when U.S. Treasury Secretary Henry Paulson and Federal Reserve Governor Ben Bernanke visit Beijing next week for the first meeting of the U.S.-China Strategic Economic Dialogue.

The two new foreign banks are the Shanghai branches of Deutsche Bank AG (DB) and Sumitomo Mitsui Banking Corp., the core banking unit of Sumitomo Mitsui Financial Group Inc, SAFE said.

The four domestic banks are China Minsheng Banking Corp, China Hua Xia Bank Co, China Everbright Bank Co, and policy lender China Development Bank.

The newly approved banks will be allowed to start acting as market makers Dec. 18.

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