Renminbi: Consequences And Influences
The Full Convertibility of Renminbi: Consequences and Influences by Dominic Michael Gebele
Introduction
Since 1979, a policy of the opening to the outside world was followed in China. It was also at that time that China started the progress of Renminbi towards full convertibility. Introduction of currency convertibility is one of the most crucial parts of a country’s economic reforms, especially for those formerly centrally planned economies, an economic system in which the state or workers' councils manage the economy. In such economies the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. To talk about one currency’s convertibility often implies
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Members of this foreign market exchange refers to those domestic financial institutions (including banks, non bank financial institutions and foreign institutions) which may conduct foreign exchange business (spot, swap and forward foreign exchange transactions) approved by the State Administration of Foreign Exchange. Daily earnings in foreign exchange of enterprises from exporting has to be settled to designated foreign exchange banks. At the same time, it established an interbank foreign exchange trading market to implement a banks’ sale of foreign exchange system. Due to existing restrictions on foreign exchange demands by foreign owned enterprises and individuals, convertibility under RMB’s current account is still …show more content…
China implemented a new interbank system called China Foreign Exchange Trading System (CFETS) in Shanghai. The foreign exchange trading system is linked to major cities across China through satellite and ground communications. Three currencies are traded on CFETS: Hong Kong dollar, Japanese yen, and U.S. dollar. The People’s Bank of China sets the opening quotes of the foreign rate based on the previous day and allows a narrow range of daily fluctuation. For example, the U.S. dollar has a band of 0.3% on either side of the initial given spot rate. If the rate exceeds the defined band, currency trading stops automatically. The current spot exchange rates in China, allowing for the impact of some degree of supply and demand forces, are largely subject to government control. Up to the end of 2009, members of foreign exchange trading system increased from 3 to 65, including 45 foreign banks. Moreover, foreign banks are considered as the main
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