Challenges from WTO Membership
Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu
Chapter 8: China’s Foreign Exchange Market
Gaiyan Zhang OVERVIEW China holds a signiﬁcant and growing place in the international trading system1 and it is appropriate that China acquire the ﬁnancial tools available commensurate with its size and presence in the markets. As the country becomes more market oriented and global, China is actively taking steps to modernize its ﬁnancial infrastructure. A deep and liquid foreign exchange market is a perquisite for a more ﬂexible foreign exchange rate regime and gradual liberalization of the capital account. Since China’s opening-up and reform in 1978, and particularly after the foreign exchange reform in 1994, China’s foreign exchange market has witnessed signiﬁcant progress in a variety of aspects, including market infrastructure, products and services. The market volume has steadily increased over the past decade. The annual turnover reached US$209 billion in 2004, with an average daily turnover of US$829 million, an increase of 411 percent compared to that in 1994 (Figure 8.1). However, due to the inconvertibility of RMB under capital account and the limited currency ﬂexibility, China’s foreign exchange market is still an insulated market that is independent of movements of international foreign exchange markets. The advantage of such a market is that it helps to insulate the Chinese economy from speculative external shocks that can be destabilizing. It also enables Chinese policymakers to have better control of fund inﬂow and outﬂow in order to maintain economic stability for the Chinese economy. Nonetheless, the lack of openness and competition renders the market an...
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