Evolution of China’s Foreign Exchange System

【Abstract】For a long time, China has been implementing relatively strict foreign exchange administration system due to shortage of foreign exchange resources, insufficiency of macro control capability, imperfection of market system. Since China took on the innovative opening-up policy in 1978, China forms a foreign exchange administration profile——“RMB (Chinese Yuan) is convertible for current account items, while partially convertible for capital account” step by step.

【Key words】China; Foreign Exchange; Exchange regime

【作者簡介】肖莉(1976-)，女，汉族，山东临沂人，山东医学高等专科学校，讲师，硕士，研究方向：外国语言学与应用语言学。

Chinas official currency, the Renminbi (RMB), is issued and managed by the Peoples Bank of China. On December 1st, 1948, the Peoples Bank of China was founded and started to distribute the RMB. The currency is denominated in Yuan (one Yuan equals 10 Jiao, and one Jiao equals 10 fen). The exchange rate of RMB is formulated by the Peoples Bank of China, and released by the State Administration of Foreign Exchange Control. China operates foreign exchanges in unified way and the State Administration of Foreign Exchange Control exercises its functions and powers on foreign exchange control.

From 1949 till now,The evolution of Chinas foreign exchange system can be divided into four periods：

1. Exchange regime during the planned economy (1949-1978)

From 1949 to 1952, in order to adapt to the characteristics of taking over of the old China economy, the main task of the foreign exchange system is to establish a uniform, independent foreign exchange management.

In 1953, China entered the period of planned economy. A highly centered, planning system was implemented in the planned economy environment. Bank of China was the only specialized bank involving in foreign exchange business.

2. Exchange regime during the transitional period (1979-1993)

Since 1979, there have been substantial reforms in the foreign exchange system in China. This period can be divided into two distinctive stages:

Reforms within the planning framework (1979-1986). There were two major elements in the reform of the foreign exchange system in this period: one was the introduction of a foreign exchange retention system and the other was the devaluation of RMB Yuan for trade-related transactions.

A double-track exchange rate system (1987-1993). More market-oriented reforms to Chinas foreign exchange regime began with the formal introduction of a swap market or secondary market in late 1986. This was the beginning of the transition from a planned foreign exchange regime towards one which was more market oriented.

The double-track foreign exchange rate regime has the characteristics of an overvalued official rate and an undervalued swap rate. Despite the shortcomings of the double-track foreign exchange system, reform in this period greatly enhanced Chinas exports performance.

3. Exchange regime during the socialist market economy. (Foreign exchange rate re-unification) (1994-7/21st, 2005)

In 1994, China abolished its dual exchange rate regime and instituted a managed floating exchange rate system base on market supply and demand. The main features of this round of reform included (1) unifying the official and market exchange rate by merging the former with the latter; (2) abolishing the foreign exchange retention system and replacing it with the RMB settlement system for all export earnings; (3) replacing the swap system by and inter-bank foreign exchange market with a system of managed float; (4) the abolition of approval procedures for acquiring and using foreign exchanges for current account transactions. Since the beginning of 1994, Chinas exchange rate has been determined in the China Foreign Exchange Trading Centre (CFETC), an inter-bank foreign exchange market.

Before 1997, the RMB exchange rate rose on the basis of stability, people at home and abroad had growing confidence in the RMB. Later, however, due to the eruption of the Asian financial crisis, in order to prevent a deepening crisis possibly caused by alternate devaluation of the currencies of neighboring Asian countries and regions, China, as a large responsible country, took the initiative to narrow the RMB exchange rate floating scope. Along with the gradual weakening impact of the Asian financial crisis, in recent years, Chinas economy has experienced sustained, steady and rapid development, economic structural reform has witnessed continuous deepening, new progress has been made in the financial field, foreign exchange control has been further relaxed, foreign exchange market construction has undergone constant development in depth and breath—all these have helped create conditions for improving the RMB exchange rate formation mechanism.

4. Current reform of foreign exchange rate — pegging to a basket of currencies (from July 21st, 2005 till now)

With the approval from the State Council, from July 21, 2005, China began to institute a regulated, managed floating exchange rate regime based on market supply and demand and in reference to a basket of currencies.

The contents of this reform to the RMB exchange rate formation mechanism are: The RMB exchange rate is no longer pegged to the single US dollar, but rather, in light of the actual condition of Chinas foreign economic development, a number of principal currencies will be chosen and given appropriate weight to form a package (basket) of currencies. In the mean time, in light of domestic and foreign economic and financial situation, based on market supply and demand in reference to a package of currencies to calculate changes in multilateral exchange rate indexes of the RMB, exercise management and regulation on the RMB exchange rates so as to maintain a basic stability of the RMB exchange rate on a rational and balanced level.

5. Conclusion

On the RMB exchange rate issue, the Chinese government has always chosen an exchange rate system and policy suited to Chinas national conditions by adhering to an independent, highly responsible attitude and persistently proceeding from Chinas fundamental interests and the reality of its socio-economic development. And we have confidence that Chinas reform on the foreign exchange rate of the RMB is beneficial to the economic development of China, Asia and the world.

References：

[1]Chen X. W. Cultivation and Management of Chinese foreign exchange market[M]. Shanghai: Shanghai Peoples Publishing Agency  press.

[2]Sun C. G. Foreign exchange theory and practice[J]. Beijing: Chinese Audit Publishing house.

[3]Qiao W. Historical Evolution and Developmental Prospect of Chinas Foreign Exchange Market[J]. Practice and Exploration of Chinas Foreign Exchange Market. Beijing: China Financial Publishing House.