Measures to support RMB convertibility

Chinese authorities recently announced that China will accelerate the process of convertibility of the Chinese currency (RMB) to lay a foundation to fully integrate China into the global economy and facilitate its return to the World Trade Organization (WTO). It is time to push the process forward, thanks to the sufficient supply of foreign exchange and the stable exchange rate between RMB and hard currency.

In 1994, China dropped its dual currency system by merging the Foreign Exchange Certificate (FEC) and RMB which marked the first step for RMB becoming convertible Since then, China has adopted policies to institute partial convertibility of RMB. Under this policy, the Chinese exchange control departments have imposed limits on foreign invested firms for purchasing hard currencies (there is no restriction for selling hard currencies).

China plans to relax control measures and realize unlimited convertibility under current account during the next five years. At the same time, China will establish a model for supervising and forecasting the exchange rate between RMB and hard currencies. It will also build up an exchange statistics collecting and reporting system on its international revenues and expenditures. Chinese observer predict that it will take a much longer time to liberalize the capital account, because the financial market in China is still "experimental."

The short five-year history of China 's stock market has been volatile, with speculations, rumors and scandals cropping up time and again. The peso crisis in Mexico at the end of 1994 and the bankruptcy of Barings in early 1995 also alarmed the Chinese authorities, and induced them to become more prudent in lifting financial controls.

A freer RMB to boost China 's imports and export

A freer RMB will be a great boon to the Chinese economy by boosting imports, facilitating exports and encouraging direct foreign investment.

At present, the international trading sector of the Chinese economy is under rigid administration by various state governmental bodies. Importers need to get importation quotas from one department and then apply for hard currency from another, which is very ineffective in today's competitive global market. Exporters have similar headaches when they need to convert their foreign currency to RMB in an efficient way.

This tight control on hard currency partially contributes to the increasing foreign exchange reserves of the country: they rocketed from US$ 20 billion in 1993 to US$ 73 billion in 1995. China 's trade surplus has aroused complaints in the U.S. Congress and increasing antidumping cases in Europe . Under such pressure, China has to consider a balanced international trade on the one hand and expansion of its import and export volume on the other. The country plans to increase its total imports and exports from US$ 280 billion in 1995 to US$ 400 billion by 2000.A freer RMB will certainly help reach this goal.

Relaxing administrative control measures plus a convertible RMB will drive up imports; so some worry imports will get out of control. However, the influx will be moderate compared to the import rush a few years ago. The reason for that are twofold. First, the market environment in China has improved; and second, corporate executives with a better understanding of the domestic market are the main decision-makers, while government officials were the decision makers in the past.

A mixed blessing for China 's manufacturers

In fact, the manufacturing sector of the Chinese economy will be challenged much more than the trading sector. The Chinese government plans to adopt certain measures to support its domestic industries, but it is not clear what they will be at this point. As China is bidding for reentry into the WTO, experts believe that internationally acceptable measures will be adopted to meet WTO criteria.

The challenges will vary across different manufacturing sectors. At present, China 's labor-intensive industries, such as the shoe, textile and garment industries, have proved their competitive advantages in the international market. A convertible RMB will only facilitate export of those commodities, if the overseas markets relax their quota barriers.

The negative impact of a convertible RMB on China 's electric and electronics industry will be quite limited, especially on the home appliances sector, which was vulnerable to an import influx 10 years ago. The sector has grown into a qualified competitor on a global scale.

With an annual production of 20 million color TV sets, China is already a leading manufacturer of TV sets, with China-made products occupying over 90% elf the domestic market,. Although China is a leading manufacturer of washers and refrigerators, and has been expanding its VCR and computer production at a rapid pace, there will remain a gap in production of up-to-date chips, sophisticated computers and other high-tech electronics between China and developed countries. Therefore, China will increase its import of chips, other electronic elements and advanced computers while boosting exports of its consumer electric and electronics products.

The biggest victim of a convertible RMB might be the automobile industry, if the state does not adopt proper protective measures. At present, domestic prices of cars made in China are 50 -100 % higher than similar models on the international market. The Chinese government announced that automobile manufacturing will be listed, following the international practice, as an "infant industry" in a developing country like China . Particular protection measures may include a quota system, high import tariffs for foreign cars, and requirements for foreign companies to form joint ventures with domestic auto manufacturers in China .

China may liberalize its automobile market when its auto manufacturing becomes a lull-Hedged industry. Even if Chinese manufacturers become more competitive, foreign automobile businesses may still find opportunities through cooperation with Chinese firms during the process of transition, sharing this vast market of 1.2 billion people.