Download China’s Exchange Rate System after WTO Accession

China’s Exchange Rate
System after WTO
Accession: Some
Considerations
Jian-Guang Shen,
Bank of Finland
Institute for Economies in Transition
Chinese RMB’s
exchange rate, per US$
9
8,5
8
7,5
7
6,5
6
5,5
5
1992M1
1994M1
1996M1
1998M1
2000M1
Chinese RMB’s real
effective exchange rate
120
110
100
90
80
70
1992M1
1994M1
1996M1
1998M1
2000M1
China’s exchange rate
system




Dual exchange rate regime prior to
1994
Single exchange rate since 1994
Nominally a system of managed
floating exchange rate
Practically a peg to the US dollar
supported by comprehensive, direct
capital account controls.
China’s exchange rate
market



The nation-wide inter-bank foreign
exchange market, the China Foreign
Exchange Trading Centre (CFETC)
All foreign exchange trading has been
conducted in this market. The CFETC
also provides settlement services
Over 300 foreign exchange banks and
non-banking financial institutions
Problems with China’s
exchange rate market



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Only financial institution headquarters
hold CFETC memberships
Dominated by the PBOC and BOC
Capital control regulations suppress
supply and demand
Centralised trading system has high
costs and restrictions
Only three foreign currencies (USD,
HKD, JPY), no futures and options
China’s capital control
measures I


Capital brought in from abroad must
be deposited in special accounts in
designated banks. Any repayments and
remittances from these accounts are
also subject to SAFE approval.
Foreign investment in the Chinese
stock market is limited to B shares.
Inbound foreign capital must get
SAFE approval to convert to RMB.
China’s capital control
measures II
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All long-term foreign borrowing (over
one year) must be mentioned in the
state commercial loan plan.
Commercial loans of longer than three
months but less than or equal to one
year have to be registered with SAFE,
and the conditions for repayment of
principal and interest rates must be
approved by SAFE.
China’s capital control
measures III




Only PBOC-approved state
organisations can issue bonds abroad.
Leasing and trust loans from abroad
are subject to state plans for foreign
capital utilisation.
All foreign loan guarantees require
SAFE approval.
Outbound foreign investments must
receive SAFE approval.
Results of China’s
capital control measures



China’s foreign debt structure is
dominated by medium- and longterm foreign debt
Short-term foreign capital inflows
usually are part of commercial
deals
State sovereignty debts are
significant
Four alternatives: benefits
and disadvantages




Fixed exchange rate regime
Crawling peg
Float within bands (target zone)
Managed float with no preannounced exchange rate path
Long term goal


A flexible exchange rate
mechanism with free crossborder capital mobility
The role of RMB in the
international financial market
Manage the transition

The exit strategy:
 No
depreciation pressure
 join a net capital flow situation

China satisfies both, but worries
about:
 Appreciation
pressure
 the pace of liberalization in
accordance with other financial
market development
The fixed exchange rate
system

Benefits
Stable currency
 As nominal
anchor for
monetary policy
 Prevent
currency risks


Disadvantages
Inflexible in the
face of shocks
 No monetary
autonomy under
capital
liberalisation
 prone to
currency crisis

Floating regime

Benefits
Flexible in the
face of shocks
 Monetary
autonomy under
capital
liberalisation
 Not prone to
currency crises


Disadvantages
Strong
fundamentals
needed
 Excessive
currency risks
 Interest rates
still fixed by
PBOC
 More developed
financial
markets needed

Floating within bands

Benefits
Some flexibility
in the face of
shocks
 Less strong
fundamentals
needed
 Avoid excessive
currency risks


Disadvantages
Vulnerable to
speculative
currency attacks
 Difficult to
decide the band
 Now RMB has
revaluation
pressure

Crawling Peg

Benefits
Relatively stable
currency
 Some flexibility
in the face of
shocks


Disadvantages
Vulnerable to
speculative
attacks
 Crawling rule
difficult to
design
 Low monetary
autonomy and
credibility

Capital account
liberalisation in China
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
The effect of WTO accession
Liberalisation of financial markets
 Money
market
 Capital market
 Foreign exchange market

Operational difficulties
 Commercial
banks
 Domestic enterprises
 The central bank
Capital account control
still useful
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The second-best argument:
compensation for imperfect
markets in China
Increased risks in the financial
system: the lesson of the Latin
American and Asian Crises
Assistance for monetary and fiscal
policies
Conclusions
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WTO membership needs more
flexible exchange rate system
China as a large continental-type
economy
Capital account liberalisation
inevitable
More shocks require it