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Exchange Rates

Andrew Papadimos
 

This articles is from Chinese Business Center

The PRC has a dual currency system. The value of the local currency - Renminbi (RMB or Yuan)- is fixed by the People's Bank of China on the basis of movements in a mixed basket of the currencies of its major trading partners. The RMB is non-convertible, and its export is prohibited without official permission. Purchases of imported goods are permitted only in special stores in exchange for foreign exchange certificates (FECs).

In theory, FECs are similar in value to the local Renminbi, but a thriving black market has emerged. Incoming tourists are handed FECs in exchange for their foreign currency at Chinese banks, and can illegally convert them into local RMB on a private basis at a price considerably more than their face value. Devaluation of the RMB however has eroded the difference in value between it and the FECs from approximately 2:1 in 1984 to 1.05:1 in 1991.

Since the early 1980s, the RMB has undergone significant devaluation. In 1981, the exchange rate for the Yuan was 1.705 per $US, whereas in 1990, the Yuan stood at 4.722 per $US. Graph 7 depicts the fall of the Yuan compared to other Asian currencies since 1980. In real terms, the Yuan has lost more than 60% of its value. Consequently, the PRC's exports have become increasingly attractive in international markets in comparison to other, more expensive commodities manufactured by its competitors.

Note: 1990 calculated from 1989 figures. Sources: ADB, Asian Development Outlook 1990, Table A26. ADB, Asian Development Outlook 1991, Table A26.

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