1949-1978 Period China’s currency is called Renminbi, which is Not convertible Countertrade People’s Bank of China (PBOC) trades with Western Countries Low FDI (less than $300 million)
1978-1993 Period Deng Xiaoping initiated open-door policy in 1978 New influx of trade FDI increased due to Special Economic Zones Difficulty of converting RMB into other currencies
1980 Onward Dual Currency system Foreign Exchange Certificates (FECs) are issued for foreigners All FX under control of State Administration of Exchange Control (SAEC), a division of Bank of China Objectives –Curb FX speculation –Prevent foreign goods into China –Increase PRC FX reserves
Problems of FX System Swap Market System submit bids to government, which matches buy/sell orders Invertibility of RMB American motors corporation joint venture in Peijing halted production for lack of FX in 1986 Currency value differs--black market
FX problems- continued Capital Flight Large PRC companies invest abroad and set up private accounts Overvalued official rate Swap rates were below the official rate Black market blooms
1994, New FX Reforms January 1, 1994, the official rate of RMB devalued by 33% Eliminate FX certificate practices Set up a new interbank trading system
Interbank System in China April 1994, a new interbank system called China Foreign Exchange Trading System (CFETS) was set up in Shanghai Linked to 24 cities across China via satellite and ground communications Trading rooms with orange-jacket dealers Daily trading turnover of US$270 million
FX trading practices in China Opening quotes are set by Bank of China on the basis of the rate on previous day RMB/US$ band is 0.3% RMB/HK$ band is 1.5% RMB/Yen band is 2-10% If quotes exceeds the band, trading stops automatically!
Trading (continued) Execution 5-10 minutes wait for the response, if the order is rejected, try again if the sell price is low enough, bank of China is guaranteed to buy half of the seats in the interbank market are banks (Chinese and foreign) Strong reserves --US$154.67 billion (Dec 1999) - reduced pressure for devaluation
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