When it comes to China's foreign exchange system, what’s the first thing that comes to your mind? A currency manipulator? That's your stereotype and it is wrong! In January 2020, the US dropped its designation of China as a currency manipulator and the Treasury Secretary Steven Mnuchin said in a statement that "China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability." IMF also released a report which didn't back the accusation, affirming its view that China's exchange rate was broadly in line with its economic fundamentals.Since many westerners have been misguided by groundless reports and messages about China and its foreign exchange market, it is necessary to make China's voice heard in the international community so that you can see clearly what the real China is. As the international forex market continues to expand and China is opening wider to the outside world, RMB will play a more essential role in the global market. This passage is going to provide you with some insight into China’s foreign exchange regime, including its history and development. Chapter 1 Preface (Before 1994)In modern times, the Chinese faced insurmountable obstacles and tribulations before the People's Republic of China was founded in 1949 when people became the real masters of the country for the first time. At that time, China adopted a currency system that was far different from any other countries in the world to keep the currency united, which was the most urgent issue and top priority of the government. The Common Program of the Chinese People’s Political Consultative Conference, the interim Constitution of China, stipulated that the right of issuing currency, i.e. RMB, belonged to the state; the circulation of foreign currency within the country shall be prohibited; and the buying and selling of foreign currency, gold and silver shall be handled by the state.The policy was necessary and rational. On the one hand, the new government needed to clear up the mess in the market caused by malignant inflation, and banning the circulation of gold and silver would prevent mass speculation which would make the bad situation worse. On the other hand, preventing any individuals from trading foreign currency put the semi-colonial and semi-feudal currency system to an end, allowing China to resume its currency sovereignty.In a country where no foreign currency was available, most of the foreign exchange reserves came from overseas remittance, which referred to the money sent by overseas Chinese nationals to their families or relatives at home. In the few years after the founding of the People's Republic of China, RMB was under centralized regulation by the state government. In 1951, China’s foreign exchange reserve only amounted to 45 million US dollars.In 1953, foreign trade was open to state-owned enterprises, and forex business was operated by the Bank of China. Still, RMB exchange rate, only as a standard for mapping out economic plans and settlement, was fixed and irrelevant to foreign trade. Since it was mainly used in the settlement of non-trade foreign exchange, floating rate was unnecessary. From March, 1955 to November, 1971, China’s exchange rate against USD averaged 2.4618 (RMB/USD). In August, 1971, the U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other.To prevent the shock of inflation and the sudden change in exchange rate system of western countries, China pegged its currency to a basket of international currencies. In 1978, China initiated the reform and opening-up policy, symbolizing China's integration into the global market. Since then, a foreign exchange trading system took shape, where forex administrations and multiple financial institutions became the main actors in the market. Moreover, China began to allow domestic units to retain a share of the foreign exchange they earned through export in 1979, with the proportion or ratio specified by the government.Along with its economic takeoff, China's forex business witnessed initial achievements. In October 1979, the China International Trust and Investment Corporation (CITIC) came into operation and was awarded the franchise for foreign exchange business. In 1982, the Nanyang Commercial Bank (a Hong Kong Bank) opened a branch in Shenzhen with the right to deal with foreign currency. The 1980s saw a series of domestic banks expand in the forex field, and by 1996, all domestic specialized banks have been granted the right to conduct foreign exchange business.The reform promoted China's foreign trade industry. In 1981, the government adopted the Internal Rate for Trade Settlements (IRTS) , dividing exchange rate into two parts: a special rate was designed for trade settlements while the official rate was retained for non-trade transactions, known as the dual exchange rate system. In 1985, IRTS was canceled, and the official rate was applied to trade and non-trade sectors. And as the foreign exchange earnings and the retained share kept rising, a new two-tier system was established: on the one hand, domestic units needed to turn in certain shares of their foreign exchange proceeds to the government based on the official rate; on the other hand, they were entitled to the swap market where enterprises could sell the retained share based on the market rate. During the 45 years, China tried many ways in developing its own foreign exchange system that fit its own national realities. In the initial stage, China’s exchange regime could be taken as an experiment along with the country’s exploration in developing its economy and bringing a better life for all the Chinese. All the efforts made in this phase paid off, because it laid a solid foundation for China’s exchange rate reform.
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