TNAG-1458-FCO40-1982-Relations-between-Hong-Kong-and-China-1986 — Page 50

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which are mostly denominated in foreign currencies like

the US dollar and HK dollar, will be adjusted downwards.

Although the devaluation of the Renminbi enables the

Chinese export agents to increase their earnings in terms of Renminbi from the same quantity of exports, it is unlikely that they will adjust the export prices (denominated in foreign currency) downwards significantly

unless they are compelled by market forces to do so.

It

is logical to assume that these export agents would like

to achieve a greater profit margin now in fear that it may be squeezed in future by rising supply prices.

Nevertheless, it seems reasonable to assume that the

devaluation of the Renminbi will have some dampening effects on increases in the prices of China's exports in

future. Devaluation will certainly induce China's trading

corporations to export more at the prevailing price levels as the export earnings can be converted into Renminbi at a

more favourable rate. It should, however, be noted that

the quality of China's exports is often at least as important as their prices in determining their competitiveness in the world markets.

14.

Some Chinese analysts consider that the

devaluation of the Renminbi is an attempt by the Chinese

government to move its official exchange rate more in line

with the true market exchange rate before foreign exchange

certificates are withdrawn from use. This is a necessary

step to prevent the rampant growth of foreign currency transactions in the black market. However, it appears

that the gap between the official exchange rate and the

black market rate has not narrowed significantly since the sharp devaluation in July. This suggests that the demand for foreign currencies particularly Hong Kong dollars remains strong in China, probably in anticipation of the withdrawal from use of foreign exchange certificates.

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