China

1
Chinas Foreign Exchange Market

• Presentation Outline
• Historical development of FX system
• Current FX system

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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

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1949-1978 Period

• Chinas currency is called Renminbi, which is Not
  convertible
• Countertrade
• Peoples Bank of China (PBOC) trades with Western
  Countries
• Low FDI (less than 300 million)

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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

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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

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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

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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

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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

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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 US270 million

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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!

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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 --US154.67 billion (Dec 1999) -
  reduced pressure for devaluation