CONFIDENTIAL
10
-
17.
In theory, China could have full convertibility for the Renminbi at a specific official exchange rate if it were to adopt a hundred percent foreign exchange reserve system to back up its own currency. This implies that any new issue of the Renminbi in notes would have to
be supported by an equivalent amount of foreign currencies
at the official exchange rate. However, China's total
foreign exchange reserves amounted to only US$10.8 billion
at the end of March 1987. Assuming that this amount was
to be devoted entirely to supporting the Rmb 122 billion of domestic currency in circulation (end 1986 figure),
other things being equal, the exchange rate would have to be set at about Rmb 11.3/US$1.00, a level so low that the Chinese authorities would be most unlikely to accept.
If
the 12.67 million ounces of gold reserves were also included, the exchange rate could be set at about Rmb 7.4/US$1.00. But this would still represent a depreciation of about 50% from the current official
exchange rate of Rmb 3.72/US$1.00.
18.
Moreover, under convertibility, unless China possessed more than sufficient foreign exchange reserves to support the Renminbi at a particular exchange rate it_ would find it extremely difficult to conduct domestic monetary policies by regulating the growth of its money supply, as this growth would then be determined largely by China's own ability to earn and accumulate foreign exchange. Thus, domestic policy measures might have to be compromised to provide for currency convertibility, which would probably not be regarded as acceptable under the present institutional set-up of the Chinese economy. Besides, national prestige might also be at stake if the Renminbi were to be linked officially to a major currency
such as the US dollar.
G.F. 326
CONFIDENTIAL機密