China - Money

China embarked on its open-door economic policy in 1979 by reforming the agricultural sector and establishing several special economic zones (SEZs). The high export-led growth rates in the SEZs contributed to an annual inflation rate of over 10 percent in the 1980s. As a result the economy was overheating. The monetary authorities were ineffective in dealing with inflation. Fiscal revenues declined during the reform period and pressed the Ministry of Finance (MOF) to sell bonds to the central

Exchange rates: China
yuan per US$1
Jan 2001	8.2776
2000	8.2785
1999	8.2783
1998	8.2790
1997	8.2898
1996	8.3142
Note: Beginning January 1, 1994, the People's Bank of China quotes the midpoint rate against the US dollar based on the previous day's prevailing rate in the interbank foreign exchange market.
SOURCE: CIA World Factbook 2001 [ONLINE].

bank in exchange for currency to cover its budget deficit and to release aggravating inflationary pressures. By 1994, laws were passed to create a more consistent and more transparent tax system, which would reverse the steady decline in fiscal revenues. The new laws also banned fiscal overdrafts on the financial system. In reflecting tighter monetary policies and stronger measures to control food prices, inflation dropped sharply between 1995 and 1999.

Financial reform first appeared in 1984, when the People's Bank (monobank) discarded its commercial banking functions to become a central bank. The 3 specialized banks were reformed as commercial banks, passing on their policy lending to newly established policy banks. The banking system was decentralized, and inter-bank competition was allowed. Urban and rural credit cooperatives were established as alternative banking institutions. Interest rates remained under government control; preferential lending rates have been removed in certain sectors but continue in many others. Although lending rates are a highly political issue for the impact on state-owned enterprise (SOE) debt-servicing obligations, deregulating lending rates and deposit will be on the official agenda. Various ministries, including the monobank and the State Planning Commission, are in charge of a credit plan that involves a multi-step, highly negotiated process in which lending quotas are allocated to the state banks (lenders) based on their balance of deposits against borrowings. A re-lending facility allows the central bank to reallocate deposits from surplus to deficit ones at bank levels or regional levels. The mechanism is funded by reserves set at 20 percent of deposits; thus, deposit-poor lenders are assured that their allocated funding requirements will be covered by monobank loans.

Under the re-lending facility the loans are generally rolled over, which make up 30 percent of state banks' liabilities and are estimated to equal 3 to 4 percent of the GDP. The continuing injection of funds to SOEs under the credit plan allowed many profitless SOEs to remain in business, some SOEs even staying while making a net loss. Many of the loans to SOEs could not be called back and eventually became the bank's liabilities, which suggests that any financial sector reform and resolution of the SOE debt problem are intricately linked. Moreover, the continued reliance on state bank loans to support SOEs has also exacerbated the government's fiscal weakness, as it causes the lack of funds for much-needed enterprise and welfare reforms.

China used 2 systems of currency between 1979 and 1994: Renminbi and Foreign Exchange Certificates (FEC). Foreign exchange could be obtained through either FEC exchange centers (FECs) or foreign exchange adjustment centers (FEACs) until the 1994 currency unification. There were over 100 FEACs, or swap centers, where foreign currency was exchanged at a floating rate that varied widely among the centers in the 1980s. By 1993, 80 percent of all foreign exchange transactions were handled by FEACs. With the currency unification of 1994 came the gradual, complete withdrawal of FECs altogether from foreign exchange. The yuan's exchange rate is determined by the swap centers. It is noticeable that the movements toward convertibility of the current account have allowed foreign firms to make their transactions through designated foreign exchange banks and through FEACs. However, the domestic firms must sell all of their foreign exchange holdings to designated banks.