China’s Foreign Exchange
Market
• Presentation Outline
• Historical development of FX system
• Current FX system
Foreign Exchange Quotes
Financial Times or WSJ
• 1US$= 8.27 Yuan (or RMB)
RMB 8.27/US$
– 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 for 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