China Foreign Exchange, External Debt, Guarantee Management Q&A: English

Author: Zheng Shuangqing
Editor-in-Chief: Wu Canfei
Publisher:
Publishing Date: 2000-01-01
Features:
Segment: ExchangeRate1.
Question: What is the implication of the consolidation of the dual exchange rate?
Answer: China practiced a dual exchange rate system for a period of time, namely, the coexistence of the official exchange rate and the market exchange rate, in the light of the characteristics of its economic development. In order to keep up with the changes in the value of the Renminbi (RMB), promote exports, balance international payments, and meet the needs of the development of the national economy and the international economy, as well as the General Agreement on Tariffs and Trade, the dual exchange rate system was consolidated into a single, controlled RMB floating exchange rate system based on the market exchange rate.
2.
Question: How did the dual exchange rate become the single exchange rate?
Answer: In 1978, when China exported one U.S. dollar's worth of commodities, the average cost of exchange in RMB was 2.53 yuan, but the official exchange rate between RMB and the U.S. dollar was 1.5 yuan. The high value of the RMB resulted in losses from exports and profits from imports. In order to change this irrational situation and make the RMB exchange rate suit the actual conditions in China, the government began on January 1, 1981, to adopt different exchange rates for trade and non-trade transactions, and fixed an internal settling price for foreign exchange for the settlement of import and export accounts. It lowered the RMB exchange rate of 1.5 yuan to 2.8 yuan to one U.S. dollar, devaluing the Chinese currency by 45 percent. The exchange rate between RMB and the U.S. dollar remained unchanged between 1981 and 1984. The official rate for non-trade transactions was kept in operation and adjusted from time to time in accordance with the changes in the international market exchange rates. At the same time, as the U.S. dollar exchange rate in the international market continued to rise, the official RMB exchange rate was gradually lowered, and it became equal to the internal settling price for foreign exchange in the trade account by the end of 1984. Beginning from January 1, 1985, China canceled the internal settling price for the trade of foreign exchange earnings and adopted the single exchange rate of 2.8 yuan RMB to 1 U.S. dollar. After 1985, the RMB exchange rate was lowered by big margins several times. By June 1986, one U.S. dollar was sold for 3.2 yuan RMB. The rate was again adjusted from 1 U.S. dollar to 3.2 yuan RMB to 1 U.S. dollar to 3.27 yuan RMB on July 5, 1986. In other words, the Renminbi was devalued by 13.6 percent. It was lowered to 4.72 yuan RMB to 1 U.S. dollar on December 16, 1989—a devaluation of 21.2 percent—and to 5.22 yuan RMB on November 17, 1990, a devaluation of 9.57 percent. Beginning in April 1991, the exchange rate was regularly and flexibly adjusted. On September 10, 1993, the exchange rate was lowered to 5.78 yuan RMB, a devaluation of 10 percent. On January 1, 1994, it was lowered to 8.7 yuan RMB, a devaluation of 50 percent.