Chapter 2 Late Starter (1994-2005)On November 14, 1993, the Third Plenary Session of the 14th Central Committee of the Chinese Communist Party approved a decision on several issues of establishing socialist market economy system. With the ever-expanding economic openness and gradually deepening market reform, the State Council launched an important exchange rate reform in 1994.On January 1, 1994, the two-tier system was changed into a unified regulated exchange rate system pegged to US dollars. Foreign exchange retention system was replaced by foreign exchange settlement and sale system. A national unified regulated foreign exchange trading market was established, and RMB was made conditional convertible under the current account. On that date, the new official rate was set at 8.7 yuan/dollar.The exchange market at that time could be divided into two levels. The retail foreign exchange market referred to the market formed by foreign exchange transactions executed between the banks, enterprises, and individuals. The interbank foreign exchange market was formed by the buying and selling of foreign currencies among financial institutions, such as commercial banks. On April 1, 1994, the China Foreign Exchange Trade System (CFETS) was set up in Shanghai as an interbank trading and foreign exchange division of China's central bank.To increase foreign exchange reserve, the state adopted a Compulsory Foreign Exchange Settlement and Sales System, which referred to the administrative arrangement whereby the foreign exchange income obtained by residents shall be sold to financial institutions at a certain proportion designated by the State and foreign exchange to be utilized shall be purchased from financial institutions at a certain proportion designated by the state.The system supported the development of the real economy and safeguarded the economic and financial security of China at that time. The exchange rate reform in 1994 made great achievements including stabilizing exchange rate level, easing the pressure of capital outflow and enhancing China's trade competitiveness. During this phase, RMB exchange rate remained stable at around 8.27 to 8.28 yuan/dollar for a very long time. In the period of Asian financial crisis in 1997, the Chinese government promised not to devalue its RMB by sizing up the situation and weighing the advantages and disadvantages and avoided the domino devaluation of currencies of Asian countries and regions. The practice received wide praise from the international community.In the 21st Century, after admitted to the WTO, China's forex market entered a pre-mature stage. On October 30, 2002, the Shanghai Gold Exchange started official operation, providing transaction services of gold, silver and platinum. In 2003, the China Construction Bank launched a QUANTO product, which was the first foreign currency-related financial product released by domestic commercial banks. In 2005, forex broker CMC Markets set up its first overseas office in Beijing. China's forex reform was like"crossing the river by feeling the stones", and after accumulating experience in this phase, China was ready to open its market wider to the outside world.
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