Information about Asia and the Pacific Asia y el Pacífico
Chapter

II Exchange and Trade System Reforms

Author(s):
David Burton, Wanda Tseng, Kalpana Kochhar, Hoe Khor, and Dubravko Mihaljek
Published Date:
September 1994
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Information about Asia and the Pacific Asia y el Pacífico
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At the outset of the reform process in 1978, almost all foreign trade was subject to planning and was carried out through a handful of foreign trade corporations (FTCs). Since then, as part of the reform process, the trade and exchange system has been progressively liberalized. China’s growing openness and integration into the global economy is reflected in a more than threefold increase in the share of trade in GNP (from 10 percent to 35 percent) and a more than doubling of its share in world trade (from 1 percent to over 2 percent) during 1978–93. The main thrust of external reform has been to scale back the scope of trade planning and to shift to a reliance on market mechanisms for determining the pattern of imports and exports. While external reform, like the reform process more generally, has proceeded in spurts, considerable progress has been made over the past 15 years in opening up the economy, and a major new round of reform is under way. This section summarizes the main elements of the trade and exchange system as it stood in 1992-93 and indicates the major changes made during that period; it also describes the authorities’ reform program for 1994 and beyond.4

The trade and exchange system in 1992-93 comprised several forms of trade controls—some of which were linked to the planning process—a relatively complex tariff structure, and a dual exchange rate system with controls on some current and capital transactions.5

Trade System in 1992–93

Scope of Planning and Canalization

The role of planning in external trade had become quite limited by 1993. Mandatory planning for exports was abolished in 1991, at which time budgetary subsidies to FTCs for exports were also eliminat ed. by 1992, planning for imports covered only 11 broad product groups, accounting for about 18 percent of total imports; the scope of mandatory import planning was further scaled back in 1993 to cover only about 5 broad product groups.

The importation of products falling under the mandatory plan was canalized—that is, restricted to a small number of designated FTCs—to facilitate plan implementation and the application of subsidies as required by the plan. Imports of some other products outside the mandatory plan but considered to be of national importance were also canalized, although the number of FTCs that could import these items was much larger than for products subject to mandatory planning. Altogether, at the end of 1993, 14 products accounting for less than 20 percent of total imports were subject to canalization.6 On the export side, although mandatory planning had been eliminated, about 15 percent of total exports were estimated to have been canalized in 1992.

Imports and exports not subject to canalization could be undertaken by any enterprise authorized to engage in foreign trade. By 1993, about 5,000 domestic enterprises and 8,800 FTCs were engaged directly in foreign trade. In addition, about 80,000 foreign-funded enterprises (FFEs)7 could engage directly in exports or imports of specified products.

Import Licensing and Controls

Although the role of the plan and the scope of canalization have been reduced, a substantial proportion of imports remains regulated by licensing and other forms of control. Import licensing is administered by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and has been used for a variety of purposes, including to implement the plan, protect certain sectors, and contain overall imports for balance of payments reasons. During 1993, 53 product categories—including a range of intermediate products and some consumer goods—representing 30 percent of total imports were subject to licensing.

Control over the importation of a range of goods in the machinery and electronics sectors was exercised by the State Council Machinery and Electronics Import Control Office. Applications for the importation of machinery and electronic equipment were assessed in light of whether substitutes were available domestically. These controls, which did not overlap with import licensing, were estimated to have covered about 8 percent of total imports in 1992.

Import Tariff System

China’s tariff regime is characterized by a relatively high average tariff and a large number of tariff bands with wide dispersions. At the beginning of 1993, the average unweighted tariff stood at approximately 40 percent;8 the standard deviation of tariffs in 1992 was 30 percent. The rates tend to be lowest for raw materials and highest for finished consumer goods. More specifically, raw materials may be divided into those materials whose domestic prices are kept low, reflecting plan priorities, and those that are subject to low tariffs of under 15 percent; and lower-priority items that are subject to tariffs of 20–40 percent. Intermediate and capital goods are generally subject to rates in the 20–40 percent range. Rates on finished consumer goods are substantially higher than rates on intermediate goods; most are in excess of 60 percent, with some categories subject to average rates of over 80 percent. This structure of tariffs gives rise to very high rates of effective protection for some finished goods.

The potentially adverse effects of the tariff structure on the export sector have been mitigated by a system of duty exemptions for exporters. Exemptions are also provided for equipment imported by FFEs, and duty concessions of 50 percent are given for border trade and materials imported by FFEs for production in the domestic market. Reflecting the extensiveness of duty exemptions and reductions, revenues from tariffs amounted to about 6 percent of the c.i.f. value of imports in 1992.

Export Controls and Tariffs

On the export side, licensing also continues to be pervasive, playing a variety of roles. Since January 1, 1993, export licensing has been administered under the Temporary Provisions for the Administration of Export Commodities. Its objectives under these provisions are to improve the domestic availability of products in short supply; to limit exports to particular markets for which China is a major supplier; to implement international agreements on export restraints, such as those for textiles; to implement commitments made under international commodity agreements, such as those for tungsten and tin; and to avoid antidumping actions by partner countries. With the introduction of the temporary provisions, the number of products subject to licensing was reduced at the beginning of 1993 from 250 to 138, accounting for about 48 percent of total exports. In addition, 40 product categories—2 of which were also subject to licensing—were subject to export tariffs in 1993.

Exchange System in 1992–93

During 1986–93, China maintained a dual exchange system, with an official rate that was adjusted periodically and a more depreciated market-determined rate set in the Foreign Exchange Adjustment Centers (swap centers or the swap market).9 Under this dual system, domestic enterprises and FTCs were required to surrender their export receipts at the official exchange rate but received retention quotas equivalent to a proportion of their export earnings. These retention quotas, which entitled the owner to purchase foreign exchange at the official exchange rate, could be traded in the swap market.10 FFEs were allowed to retain all of their foreign exchange and to transact directly in foreign exchange in the swap market.

From February 1991, a uniform retention scheme was adopted, under which domestic exporters, through the retention quota system, were effectively reimbursed—for most exports—at the swap market rate for 70–80 percent of their export earnings.11 However, the state had the option to purchase 30 percentage points of the retention quota at the swap market rate—an option fully exercised during 1991—93. Prior to July 1993, this portion was sold for priority uses at the official exchange rate, with the central government absorbing the loss. After July 1, 1993, however, this foreign exchange was sold at the swap market rate, substantially reducing the amount of foreign exchange allocated at the official rate and eliminating budget subsidies for imports.

As regards access to the swap market, while there were virtually no restrictions on sales of foreign exchange after December 1991, when domestic residents were allowed to sell foreign exchange at designated branches of banks, the purchase of foreign exchange or retention quotas remained subject to approval by the State Administration of Exchange Control (SAEC). Decisions on approval were guided by a “priority list” issued by the SAEC, which comprised in 1993 seven broad categories of foreign exchange usage.12 While access to swap centers was allowed for products not covered by the priority list, such as consumer goods, the strictness with which the list was applied—and, hence, the ease of access for the importation of products not on the list—varied according to overall macroeconomic conditions and pressures on the exchange market. The way in which the priority list was applied also varied across swap centers, with its application tending to be stricter in localities where foreign exchange was in relatively short supply. In addition, local restrictions on access by enterprises outside the locality had resulted in market fragmentation and at times wide differentials in rates across centers.

As regards earnings from invisibles, domestic enterprises were also required to sell the foreign exchange to the domestic banking system. Individuals had to repatriate foreign exchange earned from working abroad but could retain those earnings in foreign currency accounts with the domestic banking system. Foreign exchange remitted from abroad to Chinese residents could also be held in foreign currency accounts with domestic banks. Foreign exchange remitted or brought into the country by foreigners could be converted at the official exchange rate into foreign exchange certificates (FECs) denominated in yuan. FECs could be used by foreigners for domestic transactions; prices for goods and services quoted in FECs were generally lower than those in local currency. Upon leaving the country, nonresident and resident foreigners were permitted to reconvert at the official exchange rate up to 50 percent of their original FECs upon presentation of documentation of the original purchase.

Under the exchange system, the after-tax profits of joint ventures could be remitted through their foreign exchange accounts. Foreign employees of joint ventures could remit their salaries and other income earned in China after payment of taxes and deduction of living expenses. Chinese residents requiring foreign exchange for remittance or travel abroad were required to apply to the local SAEC bureau for approval. Where permission was granted for travel abroad, residents were allowed to purchase a “reasonable” amount of foreign exchange to cover expenses for travel and subsistence. All such purchases of foreign exchange, except those of an official nature, had to be carried out in the swap market. Since March 1, 1993, domestic residents have been allowed to take with them up to Y 6,000 of renminbi—the currency of China—on trips abroad.

With respect to capital transactions, the SAEC had the main responsibility for monitoring China’s external borrowing. All foreign borrowing had to be registered with the SAEC; foreign exchange would not be provided to service loans that were not registered. Loans from international financial organizations and foreign governments required the clearance of the State Planning Commission (SPC) and the approval of the State Council. All medium-and long-term commercial borrowing (including bond issues) required prior approval by the SAEC. Foreign direct investment projects were in principle subject to approval by MOFTEC, but a number of provincial and local governments had been granted approval authority up to specified amounts. Outward transfers of capital, including by joint ventures, generally required SAEC approval.

Bilateral payments arrangements with all countries except Cuba were terminated. The arrangement with Cuba will be terminated on January 1, 1996.

Summary and Assessment of Reforms Through 1993

Considerable progress in liberalizing the exchange and trade system was made by 1993. In particular, the mandatory planning of trade transactions was greatly reduced, and the bulk of foreign exchange transactions (about 80 percent) took place at an exchange rate determined in a relatively open exchange market. These changes have played a crucial role in the dynamism of the export sector and, more generally, the rapid development of the economy. Nevertheless, at the end of 1993, the exchange and trade system still contained major distortions and restrictions and was lacking in transparency and uniformity. As regards the exchange system, the dual-rate structure represented a distortionary tax placed on the exports of domestic enterprises in order to subsidize priority imports. Also, access to the exchange market, even for trade and related transactions, was still discretionary, and the foreign exchange market remained fragmented.

In the trade system, almost one half of both exports and imports were subject to licensing or some other form of control, with the procedures involved implemented in a discretionary manner. The tariff system, with its high average rate and wide dispersion, has represented a further impediment to allocative efficiency. While its adverse effects have been mitigated by extensive exemptions—particularly for the export sector—the tariff system has influenced the structure of output in the domestic economy, in particular, by biasing production away from raw materials and intermediate goods toward final goods. In addition, the inadequate development of good-quality intermediate products has been a factor in the low domestic content of exports. These biases have generally been reinforced by the import and export licensing regime and by the system of export taxes. Thus, notwithstanding the trade liberalization in recent years, China’s trade regime, while comparable to some large developing countries, remains more restrictive than those of the dynamic Asian economies and some of the transition economies in Eastern Europe (Table 2).13

Table 2.Comparison of Tariff Systems of Selected Countries(In percent)
Tariffs
Trade/GNPMaximumAverageBands1Tariffs/

Imports
China (1993)378536.4696
India (1994)2326550.01338
Indonesia (1991)506020.062
Korea (1992)543010.05
Malaysia (1991)1565014.0104
Pakistan (1991)348045.01023
Philippines (1992)465024.0410
Sri Lanka (1991)575029.0415
Bolivia (1991)30210.08
Brazil (1992)155017.0610
Colombia (1992)314526.4517
Mexico (1990)252013.037
Venezuela (1992)452010.049
Czech Republic (1992)6526.03
Hungary (1993)62211.07
Poland (1993)35211.06
Romania (1992)5326013.06
Sources: World Bank (1994); IMF staff estimates; and International Monetary Fund, International Financial Statistics and Government Finance Statistics (various issues).

Numbers of bands.

In percent of GDP.

Sources: World Bank (1994); IMF staff estimates; and International Monetary Fund, International Financial Statistics and Government Finance Statistics (various issues).

Numbers of bands.

In percent of GDP.

Further progress in trade and exchange system reform can, through the elimination of the distortions and restrictions described above, play a major role in ensuring the dynamism of the economy and helping to spread the benefits of reform more uniformly throughout the country.

Current Reform Program

Recognizing the crucial role for external sector reform in achieving the broader objectives for reform and economic development, the authorities have embarked in 1994 on a new and far-reaching round of external liberalization. Their objective is to move toward a uniform and transparent system that is based on rules, relies on macroeconomic policies for managing the balance of payments, and is conducive to the efficient economic development of the country as a whole. Key elements in this strategy are the unification of the exchange rates and achievement of significant—and, eventually, full—current account convertibility; a major reduction in the scope of import licensing and other controls; and a substantial reduction in tariffs. The remainder of this section describes the authorities’ policy program in more detail, especially the exchange system reforms implemented at the start of 1994.

Exchange System

On January 1, 1994, a new exchange system was introduced; the implementing regulations, particularly those pertaining to the sale and purchase of foreign exchange, apply to domestic enterprises only. Under the new system, the exchange rates were unified at the prevailing swap market rate on January 1, 1994. At the same time, the retention system was abolished, although enterprises may continue to use their outstanding retention quotas to purchase foreign exchange at the official exchange rate prevailing at the end of December 1993.14

Domestic enterprises are required to sell their foreign exchange receipts from abroad to designated financial institutions. However, foreign exchange receipts may be held in foreign currency accounts in cases involving FFEs; Chinese residents and foreign nationals; foreign direct investment; foreign borrowing and the issuance of stocks and bonds abroad; foreign exchange approved for servicing foreign currency debt; donations for use abroad, as provided in donation agreements; and foreign exchange of embassies, consulates, international organizations, and offices of other nonresident legal entities. FECs will no longer be issued; while the existing FECs can continue to be used, they will be gradually withdrawn from circulation at the official rate prevailing on December 31, 1993. The renminbi was declared the only legal tender in China, with effect from January 1, 1994, and foreign exchange must be converted into renminbi to meet all local expenditure needs.15

Under the new exchange system, the requirement to obtain approval from the SAEC for the purchase of foreign exchange for trade and trade-related transactions—and, with it, the priority list—has been abolished. Foreign exchange for trade transactions may be purchased from designated financial institutions by the importer upon presentation of valid invoices or other commercial bills; for imports subject to licensing, quotas, or automatic registration (see below), presentation of the relevant documentation (for example, import licenses, certificates, and registration) is also required. Foreign exchange may be purchased to pay for trade-related services upon presentation of contracts or payment notices. Regulations and approval procedures for nontrade-related services and capital transactions, as described above, continue to apply.

The unified exchange rate is determined in an interbank market. On April 1, 1994, the China Foreign Exchange Trading System (CFETS) in Shanghai, a nationally integrated electronic system for foreign exchange trading, became operational. The CFETS electronically links the interbank market and the major swap centers, and accounts for the bulk of total foreign exchange transactions.16 As a national market, the CFETS has largely eliminated the fragmentation of the foreign exchange market that resulted from the tendency of local authorities to protect local holdings of foreign exchange. To trade in the new system, a financial institution has to become a member of the CFETS; by May 1994, more than 200 financial institutions had become members. However, only designated local banks and their branches are allowed to buy and sell foreign exchange among themselves on their own account. Other financial institutions, including foreign banks, may sell foreign exchange or trade among themselves on behalf of their customers.

Unlike domestic enterprises, FFEs operate under different regulations that form the broad framework of the foreign exchange balancing requirement (Box 1)—some important features of which are the right to retain all their foreign exchange in designated banks17 and the requirement to use the swap centers to balance their foreign exchange needs. Also, FFEs continue to need approval from the SAEC for each transaction in the swap centers.

In practice, foreign exchange trading for FFEs in those swap centers that are electronically linked to the CFETS has been fully integrated with trading in the interbank market. The interbank market exchange rate is established in this integrated trading, and all transactions in the swap centers (that are not linked to the CFETS) take place at that rate. In the unlinked centers, the local PBC branch, in practice, stands ready to absorb excess supply and meet excess demand, and transacts through the CFETS to meet any demand exceeding resources at its disposal. Nevertheless, with different rules for access to foreign exchange, the new foreign exchange system is segmented between domestic enterprises and FFEs.

Box I.Foreign Exchange Balancing Requirement for Foreign-Funded Enterprises

With the advent of economic reforms and the opening up of the economy to direct foreign investment since 1978, numerous FFEs have been established in China. The foreign exchange regulations governing FFEs require that they operate within a system of self-sufficiency in foreign exchange—that is, FFEs are required to “balance” their foreign exchange income and expenditure. The legal framework for the balancing requirement is complex. It is embodied in the Foreign Investment Law of 1979 and its implementing regulations; the provisional exchange control regulations of 1980, as well as the implementing rules and subsequent amendments to the regulations; and the individual investment contracts establishing the FFEs.

Arrangements for the foreign exchange income and expenditure are specified in the investment contracts. In general, each FFE is expected to generate sufficient foreign exchange income, mainly through exports, to cover its own foreign exchange expenditure, such as imports, expatriate salaries and expenses, and profit remittances. However, where an imbalance is envisaged to arise, balance can be achieved through adjustment, and, as discussed below, the channels for adjustment have been widened over time. An FFE is required to submit a foreign exchange budget each December for the following year, as well as periodic reports of its foreign exchange income and expenditure during the year. Approval of the foreign exchange budget provides the basis for approving applications to purchase foreign exchange the following year. Another feature of the foreign exchange regulations for FFEs is that, in contrast to domestic enterprises, which must surrender most of their foreign exchange,1 FFEs are allowed to retain all their foreign exchange in designated local banks.

The operation of the balancing requirement has been modified over time. Initially, an FFE facing a foreign exchange imbalance was to seek adjustment from the retained foreign exchange of local governments2 and, if that were not possible, to refer to the central authorities for resolution. In 1986, the balancing requirement was broadened to apply to the FFE sector as a whole (rather than to an individual FFE) by allowing FFEs with a shortage of foreign exchange to purchase foreign exchange from other FFEs with a surplus through the swap centers, subject to approval by the local SAECs.3 With the rapid growth of the swap centers and the participation of domestic enterprises, trading in the swap centers became the principal means for FFEs to meet their foreign exchange needs.4 However, as the swap centers were locally based and trading among the swap centers was not integrated, access to swap centers varied, depending on local conditions.

Other ways for FFEs to obtain foreign exchange included the sale of foreign exchange in the domestic market of certain approved products produced by FFEs;5 the use of renminbi earnings to purchase domestic products for export, following approval by MOFTEC; and the reinvestment of renminbi earnings in new joint ventures with the capacity to earn foreign exchange.

With the introduction of the exchange system reform in January 1994, FFEs continue to be allowed to retain all their foreign exchange in local banks and to sell or purchase foreign exchange in the swap centers. Since the issuance of the new rules in April 1994,6 in order to open a foreign exchange account, an FFE must apply to the SAEC to obtain a “foreign exchange registration certificate.” Each transaction in the swap centers also requires the approval of the local SAEC. Domestic enterprises, in contrast, are required to sell their foreign exchange to designated banks; in turn, they can purchase foreign exchange from designated banks for trade-related transactions upon presentation of relevant documentation. Thus, the foreign exchange system has two segments: an interbank market for domestic enterprises, and the swap centers for FFEs. Since the China Foreign Exchange Trading System became operational in April 1994, the major swap centers, accounting for the bulk of all foreign exchange transactions, are electronically linked, and trading among these centers is integrated.

1 Prior to 1994, domestic enterprises were given retention quotas amounting to a certain portion of their foreign exchange earnings, which they could either sell or use to repurchase foreign exchange at the official exchange rate (see Khor (1993)).2 In 1979, local governments were allowed to retain a certain portion of the foreign exchange earnings originating from their localities.3 In practice, even before 1986, there had been some trading of foreign exchange among FFEs on an informal basis.4 A survey by the U.S.-China Business Council reported in October 1993 that about three fourths of all FFEs used the swap centers to meet about half of their foreign exchange needs.5 This method was terminated in 1994.6 The Provisional Regulations on the Administration of Foreign Exchange Settlement, Sales, and Payments, and the Provisional Measures for the Administration of Foreign Exchange Accounts.

The new unified exchange arrangement is a managed float. At the start of trading each day, the PBC announces a reference rate based on the average of the buying and selling rates against the U.S. dollar at the close of the previous day’s trading.18 Movement of the renminbi against the U.S. dollar is limited to 0.3 percent on either side of the reference rate, with the PBC intervening in the interbank market through purchases and sales of foreign exchange to keep the exchange rate within this limit. During the first six months of 1994, the exchange rate remained stable at about Y 8.7 per U.S. dollar (Chart 2), and the foreign exchange holdings of the PBC rose.

Chart 2.Exchange Rate Developments, 1988–July 19941

(In yuan per U.S. dollar)

Sources: Chinese authorities: and IMF staff estimates.

1 Monthly average: downward movement indicates depreciation of the renminbi.

2 On January 1, 1994 the exchange rates were unified at about Y B.7 per U.S. dollar. Since then, the rate has been determined in the interbank market.

3 These centers were established in late 1986.

Trade Planning and Canalization

Effective 1994, all remaining mandatory trade planning has been eliminated. Canalization will be limited to those few products subject to guidance planning, under which import ranges (rather than specific targets) are established and administered flexibly. Also, the procedures for the approval of enterprises’ engagement in foreign trade are being liberalized, with the ultimate objective of moving to a registration system under which approval will not be required. Although, during the transition period, approval will continue to be required, it will be based on clear criteria.

Import Licensing and Controls

Under an agreement on trade liberalization reached with the United States in October 1992, China is to remove the bulk of its import licensing and quota controls over a five-year period. As part of mis process, import licenses and quota controls for 283 commodities in 9 categories were removed on December 31, 1993.19 The authorities plan to remove licensing requirements and quota controls from a further 20 categories—including tobacco products and petroleum—by the end of December 1994, and from another 3 categories by the end of December 1995. On May 25, 1994, the authorities eliminated import licenses and quotas on another 195 commodities, including 30 items scheduled for removal by the end of 1994 and 120 items scheduled for removal by the end of 1995 under the agreement with the United States.

As regards import controls on machinery and electronic equipment and other general commodities, new regulations for their administration were implemented that narrowed the scope of controls and simplified import procedures.20 The list of machinery and electronic products subject to import suspension (covering 165 commodities) and the list of imports subject to unified control by approved agencies (covering 388 commodities) were eliminated. Control procedures on products in 18 categories21 were replaced by the administration of open quotas, and the procurement policy for another 171 categories was changed to one based on international competitive tenders. For other machinery and equipment, registration for surveillance purposes would be required before importation. With regard to other commodities, a new standardized quota system was introduced that applies to 26 types of commodities, including grains, rubber, and petroleum.

Import Tariff System

Tariffs were lowered by 8.8 percent at the end of December 1993 on 2,898 commodities, covering mainly raw materials and machinery and equipment in short supply domestically. These reductions lowered China’s average tariff rate from 39.9 percent to 36.4 percent. In addition, tariff rates on two categories of imported automobiles were lowered from 220 percent and 180 percent to 150 percent and 110 percent, respectively, reducing the overall tariff level by another 1.4 percent.

In the context of negotiation for reaccession to the General Agreement on Tariffs and Trade (GATT), the authorities have made offers on further trade liberalization, which continue to be subject to negotiations with major trade partners. The offers include the binding of the tariff on most nonagricultural products to a maximum of 40 percent.22 By 1998, the 40 percent ceiling will be further reduced to 35 percent. In order to protect certain industries, the authorities intend to exempt from the binding tariff ceiling about 10 percent of all nonagricultural products. The authorities also intend to bind the tariff on all agricultural products. Tariff rates on more than 500 items (that are subject to rates exceeding 40 percent under the 1992 tariff schedule) will be lowered to 40 percent over a ten-year period; for the remaining tariff lines, tariffs will be reduced by at least 10 percent. With respect to those agricultural products that are subject to quantitative restrictions or other nontariff barriers, including cereals, edible sugar, certain vegetable oils, and soybean, the authorities have indicated their commitment to a minimum degree of market access equivalent to 3-5 percent of domestic consumption.

Legal Framework

Another objective of trade reforms is for foreign trade to be conducted within a clear legal framework and under transparent implementing regulations that apply uniformly across the country. Since October 1993, MOFTEC has published 93 documents governing trade that remain in effect and has rescinded 744 internal documents. The Foreign Trade Law was enacted by the Standing Committee of the National People’s Congress on May 12, 1994 and became effective on July 1, 1994; implementing regulations are being worked out. The Foreign Trade Law establishes a unified legal framework for the conduct of foreign trade and should help to improve transparency.

4

The evolution of the exchange and trade system during 1978–92 is not discussed in this section, as this is covered extensively elsewhere. Sec Bell. Khor. and Kochhar (1993) and Blejer and others (1991). Appendix III provides an empirical study of import behavior in China during the reform period.

5

The section below on the trade system in 1992–93 draws from the report by the World Bank (1994).

6

The 14 products subject to canalization were grain, sugar, steel, chemical fertilizers, crude oil, oil products, rubber, timber, polyester synthetic fibers, tobacco products, pesticides, agroplastic foil, cotton, and wool.

7

FFEs include Sino-foreign equity joint ventures. Sino-foreign cooperative ventures, and wholly owned foreign enterprises.

8

Tariffs were reduced at the end of 1992 on 3,371 tariff items (which accounted for approximately 54 percent of the total), resulting in a lowering of the average tariff by about 3 percentage points. The reductions were concentrated on raw materials, technically advanced goods not produced domestically, products produced in developing countries, and manufactured goods for which China is competitive in international markets.

9

The swap market rate was initially set by the authorities, becoming market determined in 1988. By 1993, there were 109 swap centers. Prices in 18 of the centers were determined by an electronic open bidding process and by the manual matching of written offers to buy and sell in the other cities. The operation of the swap market and access to the market are described in Khor (1993) and Bell, Khor, and Kochhar (1993).

10

The price of retention quotas was equal to the premium of the swap market exchange rate over the official rate.

11

For a description of the retention system, see Bell, Khor, and Kochhar (1993).

12

The seven categories were agricultural inputs, such as fertilizers and diesel fuel; grains; high-technology equipment and industrial raw materials; repayment of external debt or domestic loans denominated in foreign currency; imports for key construction projects; equipment and materials for research, educational, cultural, and medical purposes; and operational needs of FFEs. The list was modified periodically, with the general trend toward liberalization; the most recent change was the addition at the beginning of 1993 of the repayment of domestic loans denominated in foreign currency.

13

For a detailed assessment of the effects of China’s trade regime, see World Bank (1994).

14

For undistributed quotas for which foreign exchange was sold before December 31, 1993, the distribution and deposit of quotas into relevant accounts had to be completed before the end of January 1994.

15

In practice, the use of Hong Kong dollars is still pervasive in the southern Guangdong Province.

16

By May 1994, 12 swap centers were linked to the system, and it is expected that another 8 centers will be connected during the course of the year. The 12 centers linked to the system by May are located in Shanghai, Beijing, Tianjin, Hangzhou, Shenzhen, Chengdu, Xiamen, Qingdao, Changsha, Guangzhou. Nanjing, and Wuhan.

17

New rules for establishing foreign exchange bank accounts were issued on April 1, 1994, requiring FFEs to obtain a “Foreign Exchange Registration Certificate” from the SAEC before opening a foreign exchange account.

18

The PBC also publishes exchange rates of the renminbi againsl other major currencies on the basis of exchange rates on world currency markets.

19

The categories are steel products, steel billets, scrap steel, Chinese medicine, polycarbonate, coffee and coffee products, civilian airplanes, assembly processing equipment, and black-and-white television picture tubes.

20

“Provisional Method for Regulating Importation of Machinery and Electronic Products,” issued on October 7, 1993, and “Provisional Method for Regulating Importation of General Goods,” issued on December 22, 1993.

21

Including automobiles, motorcycles, videocassette reconjers, computers, and air conditioners.

22

This will bring down to 40 percent the tariff rates on more than 2,000 tariff lines subject to rates higher than 40 percent under the 1992 import schedule, thereby reducing the overall tariff level.

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