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142547 MDLIAN 8004
(C). PARTIAL CONVERTIBILITY (EG FOR FOREIGN ENTERPRISES ONLY):
(D) FULL CONVERTIBILITY.
8.
NO CHINESE OFFICIAL IS PREPARED TO PUT A DATE ON HOW LONG THIS WILL TAKE. 3-5 YEARS APPEARS TO BE A MINIMUM. THE KEY CURRENT ISSUE IS HOW SOON THE DUAL RATES CAN BE ALIGNED. PRESENT CIRCUMSTANCES MILITATE AGAINST THIS. ALTHOUGH DISTORTIONS EXIST IN THE SWAP SYSTEM, THE SWAP RATE, BLACK MARKET RATE AND FREE MARKET RATE IN HONG KONG ARE BEGINNING TO CONVERGE AND THEREFORE CAST DOUBT ON THE GOVERNMENT CONTENTION THAT THE OFFICIAL RATE MORE ACCURATELY REFLECTS THE 'REAL' VALUE OF THE RMB. THE MAIN REASON FOR THE FALL IN THE MARKET RATES IS CHINA'S CURRENT HIGH DEMAND FOR IMPORTS OUTSIDE THE STATE PLAN, RESULTING IN EXCESS DEMAND FOR FOREIGN CURRENCY. THIS HAS BEEN REINFORCED BY FEARS CONNECTED WITH CHINA'S GATT APPLICATION AND RISING INFLATION. THE RUSH TO BUY AND HOARD FOREIGN CURRENCY HAS FED UPON ITSELF AND FORCED THE DUAL
RATES FURTHER APART.
9. THERE ARE ALSO PRACTICAL DISINCENTIVES TO RATE UNIFICATION AT PRESENT. A DEVALUED OFFICIAL RATE WOULD RAISE THE COST OF IMPORTS WITHIN THE PLAN AND EXACERBATE INFLATION. THE IMPLICIT SUBSIDY TO CASH-STRAPPED STATE ENTERPRISES PROVIDED BY THE OFFICIAL RATE WOULD ALSO BE REMOVED AT A TIME WHEN THEY FACE THE POSSIBILITY OF OTHER FORMS OF FINANCIAL TIGHTENING INTENDED TO COOL THE ECONOMY. ALTHOUGH DEVALUATION WOULD HELP EXPORTERS, THE AUTHORITIES ARE ALIVE TO LONG-STANDING ACCUSATIONS, IN PARTICULAR BY THE UNITED STATES, OF CHINESE EXCHANGE RATE MANIPULATION INTENDED TO BOOST THE TRADE SURPLUS. SINCE THE AMERICANS CONTEND THAT EVEN THE OFFICIAL RATE UNDERVALUES THE RMB, ANYTHING MORE THAN MINOR FLUCTUATIONS WOULD LAY CHINA OPEN TO FURTHER ACCUSATIONS. THE AUTHORITIES WOULD ALSO BE POORLY PLACED TO MANAGE A UNIFIED RATE WHILE GROWTH IN THE MONEY SUPPLY REMAINS LARGELY UNCONTROLLED.
OUTLOOK
10. ULTIMATELY THE AUTHORITIES ARE TRAPPED IN A TYPICALLY CHINESE REFORM DILEMMA. THE FOREIGN EXCHANGE SYSTEM, LIKE THE ECONOMY GENERALLY, IS CAUGHT BETWEEN CENTRAL PLANNING AND MARKET REGULATION. LIBERALISATION MEASURES SUCH AS IN THE SWAP MARKETS CAN HAVE DESTABILISING EFFECTS. THE FEAR OF SOCIAL INSTABILITY ENGENDERED BY ECONOMIC DISLOCATIONS REMAINS POTENT IN THE MINDS OF POLICY MAKERS. THE ECONOMY IS CONTINUING TO DEVELOP AT A VERY
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