Download Foreign Exchange Control and Foreign Exchange System in China

Foreign Exchange Control and
Foreign Exchange System in China
On April 6, 2005 the Senate passed the motion
proposed by Senator Charles Shumer and
Lindsay Graham that RMB should revalue by
27.5% in 6 months, otherwise all the Chinese
commodities be levied 27.5% import tariff.
Why? Fixed foreign exchange regime vs. floating
foreign exchange regime
Central Planning Economy
Period (1949 – 1978)
Monopoly on foreign trade by state-owned import and
export companies; money exchange by People’s Bank of
China
All the foreign exchange income from export was sold to
the central bank; all the needs of foreign exchange for
import were approved by the central bank
No borrowing from abroad, no foreign investment in China
Transitional Period (1979 – 1993)
Foreign exchange retaining system (from 1979)
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A certain percentage of income of foreign exchange
could be kept by earners in their own account. The
kept foreign exchange could be used to import goods
approved by the government
Set-up of foreign exchange market (from 10/1980)
The units with idle foreign exchange reserve could
trade their balance with units lack of foreign exchange
 The government set the exchange rate a certain
percentage higher than the official rate. The rate was
freed to fluctuate according to supply of and demand
for foreign exchange from March 1988
 Participants were expanded from state-owned
enterprises and I&E companies to include foreigninvested enterprises and individual residents

Reform on formation of exchange rate of RMB

Dual-rate system (1981 – 1985)

Official rate and internal trade settlement rate
Adjusting official rate according to comparative
inflation rates
 Dual-rate system (1986 – 1993)

Regional foreign exchange centers were set up
 Official rate and free market rate
 Adjusting official rate more frequently but less sharply

More financial institutions were allowed to deal with
foreign exchange business

The big four, domestic commercial banks, non-banking financial
institutions, branches of foreign banks
Tight control on capital inflow and outflow
Loose control on use of exchange by individuals
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Individuals could maintain their foreign exchange account
From 1985 remitted or brought-in foreign exchange could be
kept completely
Individuals were allowed to trade their foreign exchange in the
market
Quota of buying exchange were approved by government in the
case of visiting family member abroad, immigration, studying
abroad and so on
Foreign Exchange Management
System since 1994
On November 14, 1993, “the Resolution on
Questions Concerning Establishing Socialist
Market Economy in China” was passed by the
National People’s Congress. The second round
overall reform started then. As for foreign
exchange system, it stipulated “to set up a
managed floating foreign exchange system based
on market demand and supply. Convertibility of
RMB was the final goal of the reform.
Reform Measures on Foreign
Exchange Management
Conditional convertibility of RMB

The retaining system and central planning for foreign
exchange were terminated from 1994. The central bank
guaranteed all the needs for exchange to import with
valid business documents; all the income of exchange
from export should be sold to authorized banks at market
rate except a few enterprises were allowed to keep
exchange account
The official rate and market rate were merged
into a single one. A managed floating exchange
rate system was set up.
The foreign exchange market was reconstructed
into a consolidated inter-bank market.
Authorized domestic banks, foreign banks and
the central bank became the participants.
The banks trade RMB against U.S. dollar, HK
dollar, Euro and Japanese Yen according to the
needs of their customers and their own. The
central bank intervenes the market when
necessary to stabilize the rate
Foreign-invested enterprises still enjoyed the
z account of foreign
privilege of maintaining
exchange.
The amount of quota of buying exchange for
personal use was increased a lot from January
1996
Other restrictions on current account transactions
were removed in 1996
Chinese government announced to accept the
Clause 8 of Agreement on IMF. It was an
important step toward a member of WTO
Further reform on Foreign Exchange
Management since 2005
Improvement in forming a more reasonable exchange
rate for RMB

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On July 21 2005, RMB revalued against US dollar for 2.11%
from 8.26 to 8.11. Since then RMB has revalued for more than
20%
RMB is given more flexibility to fluctuate
Relieve pressure on increased reserve and RMB’s
exchange rate
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Local investors are allowed to invest in overseas stock market
through qualified domestic investment banks
The quota of buying foreign exchange for personal use is
increased to $50, 000 or equal
Controls on capital outflow were loosen from 2006.
Government does not set quota for overseas investment any
more
Cancel the tax refund on certain exports
To improve the return on investment of foreign reserve
by setting up sovereign investment company to invest
in overseas financial institutions