Unification of China's Foreign Exchange Rates

Abstract

This paper studies China's foreign exchange market before and after the 1994 unification of the official and swap exchange rates. Examining segmentation as well as linkages among the foreign exchange adjustment centers (FEACs) reveals that the linkages were not strong enough to eliminate or narrow price differentials among FEACs. Hence, improving the foreign exchange market's efficiency requires a reform to unify the swap rates. This paper discusses the unification's implications for inflation, monetary policy, and current account convertibility. Copyright 1996 Western Economic Association International.

Currency Convertibility and Linkage Between Chinese Official and Swap Market Exchange Rates

“…The swap markets in Shanghai and Shenzhen were the most active ones, whereas most other swap markets operated infrequently and at lower levels of activity (Genzberger et al, 1994). Huang and Wong (1996) find evidence of linkage among swap market rates from major swap markets during 1992-93. Tseng et al (1994) give more details about the dual exchange rate system in China.…”

“…Thus, the study uses US$/RMB swap market rates from the Shanghai market and the HK$/RMB swap market rates from the Shenzhen market, which can be expected to be the most active and representative of the market-determined RMB exchange rates with regard to these currencies. Huang and Wong (1996) documented cointegration among swap market rates from Shanghai and Shenzhen with those from other swap markets in their regions during 1992-93. This implies that the swap rates in the Shanghai and Shenzhen markets contain the same long-run information on exchange rate movement as other swap markets.…”

China financial research: A review and synthesis

“…A swap market and a non-deliverable forward market illustrate how market participants have overcome market impediments by creating new instruments. Huang and Wong (1996) investigate China's foreign exchange market before and after the 1994 harmonization of the official and the swap exchange rates. Through foreign exchange adjustment centers, foreign enterprises short foreign currency can meet their needs by purchasing at a negotiated rate foreign exchange quotas from enterprises that have surplus foreign exchange quotas.…”

The Rise of China as an Economic Power

“…The FTCs had to surrender all foreign exchange earnings to, and purchase all foreign exchange requirements from, the government at the official renminbi exchange rate. So, at this time, the exchange rate 20 served little economic function; it was only a price for budgetary allocations under the centralised plan for foreign trade (see Huang and Wong, March 1995).…”