TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 127

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WILL BE ABOLISHED OVERNIGHT, BUT OFFICIALS DENY THAT CHANGE IS IMMINENT.

5.

HOWEVER BOTH IN ECONOMIC AND POLITICAL TERMS A MORE IMPORTANT FEATURE OF THE SYSTEM IS THE DUAL EXCHANGE RATE. AS WELL AS THE OFFICIAL RATE (CURRENTLY ABOUT US 1: RMB 5.7) THERE IS A SEMI-MARKET RATE. A SERIES OF SWAP MARKETS (CALLED FOREIGN EXCHANGE ADJUSTMENT CENTRES) WAS SET UP IN 1986 TO ENABLE ENTERPRISES TO BUY AND SELL FOREIGN CURRENCY OUTSIDE THE GOVERNMENT PLAN. (UNDER THE PLAN ONLY STATE OWNED ENTERPRISES CAN OBTAIN FOREIGN EXCHANGE AT THE OFFICIAL RATE FOR IMPORTS OF PRIORITY PRODUCTS). EXPORTERS SURRENDER FOREIGN EXCHANGE EARNINGS IN RETURN FOR A 'RETENTION QUOTA' ALLOWING THEM TO BUY BACK FOREIGN EXCHANGE

LATER. THESE QUOTAS CAN THEN BE TRADED ON THE SWAP MARKETS WITH PRICES REFLECTING SUPPLY AND DEMAND. THE OFFICIAL RATE BY CONTRAST IS SET ADMINISTRATIVELY BY THE STATE ADMINISTRATION FOR EXCHANGE CONTROL (SAEC), A BUREAU UNDER THE STATE COUNCIL BUT WHICH IS TO BE REABSORBED INTO THE PEOPLE'S BANK OF CHINA.

6. THE IMF DESCRIBE THE SWAP MARKETS AS RELATIVELY SOPHISTICATED, BUT THERE ARE SHORTCOMINGS. THEY DO NOT FORM ONE UNIFIED MARKET AND ARE STILL SUBJECT TO GOVERNMENT INTERVENTION, AS SHOWN BY THE EARLIER CAP ON THE SWAP MARKET RATE. BUT INDIVIDUAL CHINESE NOW HAVE LIMITED ACCESS TO THE MARKET AND SINCE THE START OF THIS YEAR THERE HAS BEEN PHASED IMPLEMENTATION OF A SYSTEM ALLOWING COMPANIES TO RETAIN FOREX EARNINGS IN CASH RATHER THAN QUOTAS. 26 OF THE 100 CENTRES ARE NOW LINKED BY AN ELECTRONIC QUOTATION SYSTEM.

CONVERTIBILITY AND DEVALUATION

7. THE ULTIMATE OBJECTIVE OF THE AUTHORITIES REMAINS FULL

CONVERTIBILITY OF THE RMB. THERE IS LITTLE REALISTIC PROSPECT OF THIS HAPPENING IN THE SHORT-TERM. CHINA'S EVENTUAL RE-ENTRY TO GATT WOULD HAVE IMPLICATIONS FOR ITS FOREIGN EXCHANGE MANAGEMENT, BUT WOULD NOT ENTAIL THE REMOVAL OF ALL CONTROLS. RATHER, THE SAEC SPELL OUT A PHASED PROCESS OF REFORMS, BROADLY AS FOLLOW:

(A) COMPLETE ABOLITION OF RETENTION QUOTAS AND IMPLEMENTATION

OF THE FOREIGN EXCHANGE CASH RETENTION SCHEME:

(B) UNIFICATION OF THE OFFICIAL AND SWAP MARKET RATES:

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