Foreign Exchange Control and Foreign Exchange System in China

1. Foreign Exchange Control and Foreign Exchange System in China

2. 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

3. 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

4. Transitional Period (1979 – 1993) • Foreign exchange retaining system (from 1979) • 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

5. 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 foreign-invested enterprises and individual residents

6. 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

7. 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 • 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

8. 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.

9. 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

10. 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

11. z • Foreign-invested enterprises still enjoyed the privilege of maintaining account of foreign 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

12. Further reform on Foreign Exchange Management since 2005 • Improvement in forming a more reasonable exchange rate for RMB • 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

13. Relieve pressure on increased reserve and RMB’s exchange rate • 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