Whither China's foreign exchange controls?

With the opening up of China, both foreign trade and foreign investment are assuming greater importance every day. All of these transactions involve the use of foreign exchange. In China, a system of foreign exchange control has been in operation since the founding of the nation. More recently, as a result of a growing awareness of the need for formal legislation and proper legal procedures, much of the hitherto unwritten practices regarding foreign exchange control have been refined and passed into law. I would like to examine the rationale and the economic implications of these laws. In general, we can see that China badly needs an economic way of managing its foreign exchange reserves. The existing largely administrative way of managing the country’s foreign exchange reserves inevitably leads to economic inefficiency. It also, inevitably, opens up avenues for various “economic crimes”. Although a strong political will at the top to stamp out economic crimes has met with partial success, the cost to the country is huge and cannot be gauged only by looking at the additional administrative costs that go into policing the system. Already, the situation is retarding growth and it could threaten to abort the economic reform of the country. In the first section I will discuss the operation and effects of the present foreign exchange control system. Section II describes China’s policy initiatives in response to the problems that have come to light. I will then discuss an economic way of managing China’s foreign exchange reserves in Section III, and draw some conclusions in Section IV.