My one brand, two systems cup of java has me thinking about the manipulation of national currencies in an international economic system. In particular, I reviewed what I knew and didn’t know about the rise and fall of 外汇卷 (foreign exchange certificate) as opposed to 人民币 (the People’s currency). FEC circulated from the early 60s through January 1, 1995, when the government began phasing it out, completing the process on Dec 31, 1996, just in time for Hong Kong’s Return.
Now, China’s FEC is interesting because before 1980, Chinese citizens were not allowed to hold either FEC or foreign currency, while after 1980, they were. During the Mao-era, all private citizens and work units had to change foreign currency for FEC at the Bank of China. However, even after 1980, when it was legal for Chinese nationals to hold foreign currency, FEC continued to circulate. Moreover, even foreigners who came to China were required to use FEC to buy luxury items at Friendship stores. What I’m trying to figure out is why?
According to a friend, the answer is simple: China didn’t have enough foreign cash reserves and need to accumulate as much as they could by controlling its domestic availability and circulation. He offered the example of the Daya Bay Nuclear Reactor, which was built with French technology. The loan used to purchase this technology was secured by a Hong Kong company because the energy ministry’s had neither the reserves nor the credit to secure a loan. On this reading, Deng Xiaoping’s exhortation that Shenzhen pioneers would have to secure investment capital — especially foreign currency — through their own initiative seems unexpectedly honest.
This answer led to conversation about other forms of currency during the era. Of note, the difference between national grain coupons (全国粮票), which could be redeemed anywhere in the country and local grain coupons (地方粮票), which could only be redeemed where issued. Apparently, a 5 jin national grain coupon was particularly valuable as it could be traded both for eggs and sex. Also mentioned was a Shanghai businessman, who in the early 80s made a fortune by buying government bonds (国债) in Nanjing and them redeeming them in Shanghai because although the face value of the bonds were the same, if the bonds were redeemed early, the exchange value was higher in Shanghai than in Nanjing.
FEC entered individual hands as foreigners came to China and needed to trade their foreign currency for FEC in order to purchase items. Yes, they could use RMB to buy items in free markets, but many foreigners who came to China in those early years report that Chinese wanted their FEC and sometimes would not do business with them unless it was for FEC. Consequently, less than a year after it became legal for individuals to hold FEC, Steven Mosher reports that there was a black market for FEC. Tellingly, by 1983, there were already couplets about Four Modernizations for cadres (owning a modern TV, tape recorder, wrist watch, and calculator), which could be purchased with FEC and the Four Modernizations for the people (hearing about, talking about, thinking about, and gazing at modernization).
Shenzhen in particular has had an interesting relationship with FEC because of access to Hong Kong dollars. Before Reform, the area was a springboard to directly enter the Hong Kong economy. However, by 1979, the Center began to consider issuing Special Zone currency because HK dollars were already circulating in the SEZ. Indeed, by November 1981, it was estimated that 8 million HK dollars were in circulation accounting for 10% of available currency in Shenzhen. By 1984, the idea of Special Zone currency had gained momentum and currency was designed because the black market exchange rate had reached 100 RMB for 63 Hong Kong dollars, well above the official exchange rate of 23.7 RMB for 100 HK dollars. Nevertheless, the following year, the Central government rejected the idea of Special Zone currency on the recommendation of Hong Kong banks — using Hong Kong dollars was good for business in the region.
I came to China before FEC was phased out, but never used it. In fact, I didn’t see actual FEC until recently and only because it is now of interest to collectors. Instead, I along with most of the folks, foreign and Chinese, living and working in the Pearl River Delta used Hong Kong dollars for transactions that in Beijing or Shanghai would have required FEC. In 2001, for example, Kenneth Chan estimated that 7.2 % of printed Hong Kong dollars circulated in Guangdong Province, assuring his readers that this amount of currency outside its home borders was insufficient to destabilize the Hong Kong economy.
So what happened after FEC ceased to exist in 1997? The yuan was then pegged to the US dollar, with an exchange rate of 8.3. However, on July 21, 2005 the yuan began to float against the US dollar, gaining in strength even as real wages continue to decline. A graph of the Chinese Yuan/US Dollar Exchange Rate Index, below:
Chart available, here, courtesy of Future of US-China Trade.