China s Foreign Exchange Market Presentation Outline

China’s Foreign Exchange Market • Presentation Outline • Historical development of FX system • Current FX system

Foreign Exchange Quotes Financial Times or WSJ • 1 US$= 8. 27 Yuan (or RMB) RMB 8. 27/US$ – Indirect quote • US$ 0. 1209/RMB (=1/8. 27) – Direct quote

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 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