2/15/2014Asia Times Online - News from greater China; Hong Kong and Taiwanhttp://www.atimes.com/atimes/China/FJ23Ad06.html3/18
The independent yuan
In April 1972, with the Hong Kong currency free floating, Chinabegan listing an official effective rate for the yuan independent of theHong Kong currency. On August 19, 1974, the effective rate of theyuan was pegged to a trade-weighted basket of 15 currencies, thecomposition of which was undisclosed to the market. The effectiverate was fixed almost daily to the floating market value of thatbasket. By December 31, 1979, the yuan's effective rate rose to 1.5to a dollar when the US Federal Reserve under Paul Volcker mounted its heroic struggle to halt US inflation by raising dollar interest rates to historical heights. On January 5, 1980, the State Council issued a decree prohibitingpayments in foreign exchange within China. On April 1, 1980,Foreign Exchange Certificates (FEC), or
, equal in valueto the yuan at the effective rate, were put into circulation, issued tonon-residents in exchange for designated hard currencies, for paying hotel bills, transportation fares and for purchases atFriendship Stores. Consumer prices were set at separate levels for the yuan and the FEC to reflect purchasing power disparity betweenthe two currencies. On January 1, 1981, a foreign trade rate with two categories wasintroduced for the RMB. For internal settlements under the foreignexchange allotment quota, the official rate was set at 2.80 yuan per dollar. This rate was formed by adding to the effective rate an"equalization price" for balancing export and import profits andlosses, and applied to all national enterprises and corporationsengaged in foreign trade as well as to receipts and expenditures inforeign exchange for trade-related transactions in invisibles such asshipping and insurance. An experimental trading system for foreign exchange wasestablished by the Bank of China in a few areas such as Beijing,Guangdong, Shanghai and Tianjin. A foreign exchange retentionquota also permitted exporters to retain a portion of export earnings.National enterprises holding foreign exchange earned through thesystem of retention quotas were permitted to sell this foreignexchange to other national enterprises that had a quota for spending foreign exchange. For dealings under the foreignexchange retention scheme, the Bank of China acted as anexclusive broker, charging 0.1%-0.3%, resulting in an effective rateof 2.803-2.808 yuan per dollar. The effective rate was applicable toall other transactions, while the official rate was largely symbolic. On January 1, 1985, the internal settlement official rate wasabolished and all trade was governed by the effective rate. OnNovember 20, 1985, authorization was granted for residents to holdforeign exchange and open foreign exchange accounts and todeposit and withdraw funds in foreign exchange. This was to serveresidents who might receive foreign currency funds from relativesand friends overseas, as individuals generally did not havepermission to engage in foreign trade to earn foreign currency. Bythe end of November 1985, the yuan, pegged to a trade-weightedbasket of currencies, was trading at 3.2 to a dollar as a result of theLourve Accord that pushed the dollar up from the downwardovershoot of the Plaza Accord two years earlier. On January 1,1986, the trade-weighted basket of currencies peg was abandonedand the effective rate was placed on a controlled float based ondevelopments in the balance of payments and in inflation trends andexchange rates of China's major trading partners and competitors.