Chapter 2.10: China s Exchange Control System


Ma Shabo, Capital Account Administration Dept., State Administration of Foreign Exchange and Li Yong, Deputy Secretary General, China Association of International Trade

China's foreign exchange control regime

Foreign exchange control is an administration policy on foreign exchange expenditure and receipts that a country adopts in a specific period of time for the purpose of maintaining the balance of international payments, stablizing its currency value and sustaining the development of the national economy. Foreign exchange control is directly correlated with the level of a country's external economic exchanges, the degree of maturity of its financial market and the level and ability of its financial control and administration. It is also directly related to the state of a country's macro-economic development as well as its international finance and foreign exchange situations. However, with enhancement in the level of a country's economic development, foreign exchange control will be gradually relaxed .

Since the opening up in 1979, China's foreign exchange control regime has experienced quite a number of reforms with the deepening of economic reform, development of the national economy and gradual convergence with the world economy. Such reforms can be divided into the following periods:

The pre-1994 period

In this period, China's economy was under a planned regime, which was reflected accordingly in rigorous foreign exchange control regulation characterized by the exercise of a principle of 'centralized administration and uniform operation'. All foreign exchange receipts, either by enterprises or an individual, had to be turned over to the State, while all foreign exchange expenditures had to be supplied by the State. The State controlled and adjusted foreign exchange receipts and expenditures through mandatory plans and directives.

Although the foreign exchange retention system and foreign exchange readjustment business were implemented in the period “ an effort to gradually bring market mechanisms into the field of foreign exchange allocation, the foreign exchange control regime was still predominantly a function of the planned economy.

The period from 1994 to 1996

To match the systemic reforms that had taken place in the fields of foreign trade, taxation and finance, the State Administration of Foreign Exchange announced its major reform measures on 1 January 1994 which included the following key points:

  • convergence of the exchange rates to implement a single market-based and managed floating exchange rate regime;

  • abolition of foreign exchange retention and submission in favour of a system of selling foreign exchange through banks;

  • establishment of a nationally uniform inter-bank foreign exchange market to improve the mechanism of exchange rate formation;

  • elimination of mandatory plans and directives for foreign exchange receipts and payments and employment of economic and legal means to adjust the international balance of payments and foreign exchange revenue and expenditure;

  • discontinuation of foreign exchange certificate issuance, the banning of foreign currency denominated pricing and settlements.

As a result of these reforms, China lifted the exchange restrictions regarding trade and non-trade payments under commercial arrangements, thereby realizing conditional convertibility of renminbi (RMB) under the current account.

Post-1996 period

Fruitful results had been achieved following the reforms to the foreign exchange regime in 1994. Foreign trade had grown rapidly , while utilization of foreign investment had drastically expanded. The international balance of payments was in equilibrium and the RMB exchange rate was steadily climbing. Under such circumstances another major reform was made to China's foreign exchange control regime.

  • inclusion of foreign-invested enterprises into the system of selling foreign exchange through the banks;

  • abolition of exchange restrictions on non-trade payments under non-commercial arrangements.

The above reform measure eliminated all exchange restrictions on current account payments, realizing the convertibility of RMB under the current account. At the same time, China officially accepted Article 8 of the International Monetary Fund on 1 December 1996, promising a foreign exchange control regime with convertibility under current account and necessary control over capital account.




Doing Business with China
Doing Business with China
ISBN: 1905050089
EAN: 2147483647
Year: 2003
Pages: 648
Authors: Lord Brittan

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