Q: China is one of the few countries controlling its
foreign exchange. Since reform and opening up, China has begun to
reform its foreign exchange administrative system. How is reform
happening? The long-term goal of this reform is to make RMB
convertible; under what circumstances can this goal be
realized?
A: Under a planned economy, China had complete control of its
foreign exchange. All of the foreign exchange resources were
concentrated for allocation and use. At the beginning of 1994, to
speed up the development of an export-oriented economy, China began
to reform its foreign exchange administrative system, introducing a
series of measures including a banking system for foreign exchange
settlement and sale, unification of exchange rates and
establishment of an inter-bank foreign exchange market.
All of this helped China to successfully realize convertibility
of RMB under current account and establish a single and managed
floating exchange rate system based on market demand and supply,
setting up a basic framework of foreign exchange resources being
allocated by the market.
After 1997, to resist the impact of the Asian financial crisis,
China adopted a policy of non-devaluation of the RMB and kept the
RMB exchange rate stable. Now, many people think that China is
still strictly controlling its capital account. This is a
misunderstanding. In fact, RMB has partly been convertible under
capital account. Among the 43 transaction items under capital
account divided by the International Monetary Fund, eight items are
completely liberalized, 11 items are under loose restriction, 18
items are under certain restrictions, and convertibility is
strictly prohibited for only six items.
China is further relaxing control on capital account items with
ripe conditions, based on meeting the purchasing demands of foreign
exchange for current account transactions. The relaxation mainly
includes supporting the overseas direct investment of Chinese
enterprises, conditionally approving some foreign-funded
multinational corporations to transfer temporarily idle capital
abroad, supporting Chinese-funded multinational corporations to
make up for assets and operational capital of their overseas
companies, allowing legal emigrants and non-citizens to remit their
legal assets in China abroad according to regulations, selectively
introducing RMB bonds issued by international financial
institutions in China, looking at introducing the system of
qualified domestic institutional investors, and permitting
qualified non-banking financial institutions to invest in foreign
securities.
In the near future, China will aim to promote the balancing of
international payments, further deepening the reform of the foreign
exchange administrative system, continuing to propel the
convertibility of RMB, exploring the market mechanism and
administrative system for adjusting international payments,
increasing the varieties of exchange in the inter-bank foreign
exchange market, trying the market-maker system of U.S. dollars,
improving the present exchange rate administration and monitoring
system, promoting reform of the RMB exchange rate formation
mechanism, and keeping the RMB stable at a rational and balanced
level.
As early as 1993, China announced that the long-term goal of
reform of the foreign exchange administrative system was to realize
the convertibility of RMB.
On the issue of RMB exchange rate reform, China will adhere to
the principles of initiative, controllability and gradualness.
Initiative means to decide the form, content and time of RMB
exchange rate reform, according to the requirements of China's own
reform and development. RMB exchange rate reform will fully
consider its influence on the stability of the macro-economy,
economic growth and employment, conditions of the financial system
and financial administrative and supervision, bearing capabilities
of enterprises and foreign trade, as well as influence on the
economy and finance of neighboring countries, regions and the
world.
Controllability means that changes in the RMB exchange rate can
be controlled through macro-management. The reform should be
propelled, but not be uncontrolled. Fluctuations in the financial
market and economy should be avoided. Gradualness means to push the
reform step by step, taking both present demand and long-term
development into consideration.
All in all, China will continue to improve the formation
mechanism of the RMB exchange rate, and further complete an
exchange rate system gearing to the market with more flexibility.
But the reform is broad and has far-reaching influences. A lot of
preparation should be done, and favorable conditions and
environment are to be created so that all aspects can bear out the
possible influences. China's responsible attitude and action is
beneficial not only to the stability and development of China's
macro-economy, but also to the stability and development of the
economy of neighboring countries and the world.