انتخاب یک رژیم نرخ ارز در دوران انتقال اقتصادی: مورد از چین

The choice of an appropriate exchange rate regime during economic transition is investigated through the case of China's 1994 reform programme. Within a game-theoretic framework, the paper compares welfare under alternative policy regimes. While not upsetting government welfare, China's exchange rate unification through a floating rate has compelling benefits as a means of aborting the multiple practice. Given the choice of a flexible rate regime for convertibility, numerical simulations show a managed floater is favourable and may additionally mitigate the credibility problem associated with convertibility. Simulation outcomes also reveal China's policy preference is to place a higher weight on competitiveness than on inflation.

The recent Asian financial crisis has shown that China's exchange rate policy is a matter of considerable international concern. Given the prospect of China's accession to the WTO, the importance of China's exchange rate policy is no doubt growing. It is then of interest to examine how China will respond to her accession to WTO membership. In this respect, what exchange rate regime China will choose is vital. In this paper, we examine the recent experience of China's reform of her exchange rate regime and, based on this, we analyse what determines China's choice of alternative exchange rate regimes. In the literature, choosing an appropriate exchange rate regime has engendered considerable research interest. There are some general guidelines suggested in the literature. For an individual country, the choice depends on the properties of alternative exchange rate arrangements as well as on the country characteristics and the nature of shocks affecting the economy (Ghatak, 1995). Countries will typically choose to float their exchange rates if they have a large gross domestic product (GDP), a low degree of openness, a high inflation differential with other countries, a high degree of integration in international capital markets, and substantial diversification in traded goods Heller, 1977 and Holden et al., 1979. Besides country characteristics, the nature of the stochastic shocks may also affect a country's choice of exchange rate regime. Boyer (1978) shows that, in models with only traded goods and money, it will always be optimal to follow a managed float if the economy is subject to both goods and money market shocks. Williamson (1991) suggests that, when a country does not satisfy the following conditions for having a fixed rate system, a managed rate should be adopted. These conditions are: (a) the economy is small and open; (b) the bulk of its trade is undertaken with the country to whose currency it pegs; (c) the country wishes to pursue a macroeconomic policy that will result in an inflation rate consistent with that in the country to whose currency it pegs; (d) the real shocks to the economy should be synchronised with those in the country to whose currency it pegs; (e) the country is prepared to adopt institutional arrangements that will assure continued credibility of the fixed rate commitment. If a country does not satisfy all the above four conditions, a fixed exchange cannot provide a sensible policy regime. Economic transition in China and other countries has brought new complications. In these countries, their exchange rate regimes had typically undergone a very complex evolution before the economic transition was launched. Then, in the reforming years, the exchange rate arrangements naturally become the object of reform and thereby the choice of an exchange rate arrangement often means the reform of the policy regime in the first place. On the other hand, their choice of an appropriate exchange rate regime is being made, while their economies are undergoing enormous structural change (Sachs, 1996). The reform of the exchange rate regime is usually a part of a wider reform programme, which may contain other tasks such as the merging of multiple exchange rates and moving to convertibility. China's 1994 reform programme is a case in point. At the end of 1993, the Chinese Central Bank announced measures for advancing foreign exchange reform. With effect from the 1st of January 1994, they included unification of multiple exchange rates; adoption of a managed uniform floating exchange rate regime based on market supply and demand; abolition of the foreign exchange retention system and the introduction of a foreign exchange surrendering system; abolishing the compulsory foreign exchange plan, permitting end-users to buy foreign exchange from designated banks on presentation of valid import documentation; termination of the issuing of foreign exchange certificates (FECs) and phasing out FECs already issued; establishment of an inter-bank foreign exchange market.1 This programme marked China's latest effort of reforming its exchange rate regime. After a short period of economic rehabilitation in the early 1950s, from 1955, China had a fixed rate regime with the exchange rate of its currency (Ren-Min-Bi, RMB) being frozen for more than 17 years. After the general floating of major currencies in 1972, China switched to a composite peg under which the RMB was first pegged to a basket of 13 Western currencies and then in 1975 pegged to the average rate of the US dollar and the Deutsche Mark (Wang, 1992). In 1979, with the unfolding of economic reform, China introduced an Internal Rate for Trade Settlements (IRTS) in parallel to the official rate. The IRTS was lower than the official one and so embodied a de facto devaluation. Frequent devaluations of the official exchange rate, sometimes on a large scale, took place after 1981 with a view to redressing the overvaluation inherited from the central planning period. The reform devaluations resulted in the official rate being at par with the IRTS by the end of 1984, effectively nullifying the latter. In 1985, the official exchange rate continued to depreciate frequently, but in ministeps. The experiment with the crawling peg ended in 1986. The official exchange rate was then pegged, with occasional but large devaluations happening at intervals. Meanwhile, however, there emerged a so-called swap foreign exchange market for retained foreign exchange obtained by Chinese enterprises through exports. It was actually a misnomer to call it a “swap” market since it born no resemblance at all to modern swap markets in foreign currencies. In effect, it was a car-boot market in claims of foreign exchange retention (called the swap quotas in Chinese), latterly evolving into a national network. The price of such retention rights fluctuated with market conditions, especially from 1988. Hence, despite the fact that the official rate was pegged, the “effective” exchange rate of RMB was flexible (see Lu & Zhang, 2000 for more details). In April 1991, China announced installation of a floating rate regime, but the official rate hardly moved while the parallel swap rate was still tolerated. Then, in 1994, China declared the grand reform package as mentioned above. Quantitative restrictions on current account transactions were also abolished, first for domestic economic agents in 1994 and then for foreign investors in mid-1996. In December 1996, China officially notified the IMF of its currency being convertible on the current account. The emergence of the swap market turned out to be a crucial catalyst in the whole process. As an official parallel market, swap transactions created a regime of multiple exchange rates. In its early days, there were differentiated retention ratios for different regions and sectors, thus, embodying multiple rates. In 1991, the retention ratios were unified to 80% for all export proceeds. On the import side, however, by manipulating the proportion of imports for each sector or commodity that the authorities allowed to transact at the official rate, multiple exchange rates for imports would still exist even with a single swap exchange rate. (In a broad sense, it can be classified as a dual exchange rate or a two-tier regime. See the similar treatment of Agenor & Ucer, 1995, for India and other developing countries.) The deleterious effects of multiple exchange rates are well known in the literature. Typically, such a regime tends to result in resource misallocation, rent seeking, corruption, and budgetary problems (Dornbusch & Kuenzler, 1993). On top of these, there were additional problems in China's case. Since the retention schemes were initially regionally based, export activities in preferential regions could retain a higher proportion of export proceeds, which were saleable on the swap market at a better price. This attracted exporting resources from the hinterland into coastal regions. Export performance in the inland provinces therefore was discounted, leading to a reduction in the foreign exchange they could retain. This in turn reduced their import capacity, and thereby local production. In response, inland regions administratively blockaded the flow of exportable goods and foreign exchange out of their territories. Such a process fuelled the rising of regionalism (Huang & Wong, 1994). Fragmentation of the swap market meant the market was thin and sensitive to actual and anticipated changes in economic conditions, causing the swap rate to become more volatile than the official one. Faulty design of the market worsened the problem. According to the regulations, purchased assignments of retained foreign exchange must be spent within a specific time, while original retention rights could be held indefinitely. Scope was thus given to large enterprises, large state trading corporations in particular, to accumulate a huge amount of retention claims. As a result, entry or exit of a few large holders would induce large fluctuations of the swap rate. In extreme cases, when in anticipation of depreciation or a foreign exchange crunch, hoarding by these market makers could drive the whole market to a halt. Through this, a few large holders also had a disproportionate influence on production and consumer decisions. Multiple exchange rates were also detrimental to the deepening of trade reform. Because different sectors or regions might pay or receive different prices for the same commodity, the regime generated arbitrary incentives or disincentives. Some agents enjoyed an unfair competitive advantage, while others were disadvantaged by locating in a “wrong” area. As China's trade system gradually moved to self-responsibility, such a form of market failure worked against the spirit of the reform process. To foreign investors, multiple exchange rates meant low policy transparency and higher bureaucratic costs. Since China stipulated that inward foreign investment be counted at the official rate, while the outflow of foreign profits were at the depreciated swap rate, the regime discriminated against international investors. As the basis of the multiple rates system, the foreign exchange retention schemes were chiefly designed to provide incentives to exporters. When exporters surrendered foreign exchange to the government, they received funds in domestic currency at the official rate plus a right to retain a proportion of the proceeds for autonomous imports. These rights were only notional, with no outlay from the government being involved in granting them. Exporters might exercise these rights by importing goods or by selling them to other enterprises at the swap rate. It was therefore the importers, and ultimately the domestic consumers, who subsidised exporters. Granted that China's coastal regions were usually net sellers of the retained foreign exchange and hinterlands were net buyers, it was underdeveloped regions that subsidised the provinces that enjoyed special policy status. These problems underline the need of exchange rate unification. The government however seemed to prefer prolonging the swap market experiment until economic chaos burst. In 1992, a new round of overheating began to surge in the Chinese economy. Adding to demand pressure, large holders deliberately bought and resold the swap quotas to hike the rate (Ji, 1993). When overheating of the economy peaked in 1993, anticipation of a future depreciation led to big companies withholding their swap transactions. The sharp shortage of supply caused the swap rate to dive. On the 1st of March 1993, the State Administration of Exchange Controls (SAEC) declared a ceiling on the swap rate. The capping resulted in nothing but a complete halt of the market. After the ceiling was lifted on the 1st of June, the swap rate rocketed. In alarm, the government had to intervene repeatedly. Meanwhile, there emerged large-scale capital outflows from China. The Chinese agents involved ranged from individuals, to the state-owned travel agency, to army officers. State banks and other financial institutions reportedly were involved as well (Lin, 1994). Having fled the country, the funds disappeared into personal bank accounts, real estate, or were used for high life styles. Some were recycled into the country disguised as foreign investment to enjoy tax breaks or to evade import restrictions. Estimates of the size of capital flight from China, vary from US$8 billion to US$20 billion a year (see Drumm, 1995 and references therein). The Chinese official source estimates it amounts to at least US$1 billion a year (Zhou & Wang, 1994). Ding (1998) gives a detailed analysis of its various sources. In response, the People's Bank of China announced the 1994 reform trying to simultaneously establish a floating rate regime, the unification of multiple exchange rates, and convertibility on the current account in one package. It turned out that the reform went off smoothly (Ding, 1998). Amid the chaos, China successfully unified multiple rates into a single one that, although under state management, floats with market conditions. Convertibility on the current account has been sustained and the exchange rate has been stable, appreciating slightly rather than plunging into free fall as some had feared. To explain such a policy move, the conventional literature on the choice of exchange rate regimes appears to be inadequate. The guidance it may offer is based on ad hoc criteria with country characteristics taken as given, while in a transition economy like China the behaviour of economic agents and indeed the major parameters of the economy are changing. Moreover, in the Chinese case, the choice of a particular new exchange rate arrangement is largely a result of the reform of exchange rate policy. It is an endogenous process shaped by interactions between the policy preference of the government and the responses of economic agents, with the historic evolution of institutional arrangements in the background. In the circumstances, it is more sensible to treat China's choice of an appropriate exchange rate regime as a reform process, which in turn may be explained by welfare properties of alternative exchange rate regimes. In the literature, this welfare approach has recently been adopted by Aizenman (1994), Chin and Miller (1998), Devereux and Engel (1999), Eaton (1985), Helpman (1981), Helpman and Razin (1982), Lapan and Enders (1980), and Neumeyer (1998). The present study will follow this approach with a view to shedding critical light on the choice of exchange rate regimes in transition economies. In particular, the paper seeks to develop a framework for understanding China's exchange rate policy and its preferences. Although prominent authors have called it a matter of exceptional importance (Mundell, 1996), until recently there is little research on the Chinese exchange rate policy. This paper therefore is also an attempt to bridge this gap. The remainder of this paper is organised as follows. The focus of Section 2 is China's choice of a floating exchange rate regime while merging the multiple exchange rates. A basic model is developed to investigate the welfare implications of alternative exchange rate regimes for China. It is then applied to the analysis of China's exchange rate unification through a floating exchange rate regime. Section 3 examines the relationship between the choice of an exchange rate arrangement and China's move to convertibility on the current account, and the credibility issue arising from China's move to convertibility is explored from a wider perspective. Numerical simulations are carried out in Section 4 to shed critical lights on China's switch in the policy regime. Section 5 concludes the paper.

This paper develops a model of China's reform of her exchange rate arrangement in a game-theoretic framework. The interactions between government and enterprises are captured as a noncooperative Nash game. The comparison of welfare under alternative exchange rate regimes forms the basis for explaining the Chinese choice of regime. It is found that the regime shift had already taken place before the 1994 reform package was launched. In the presence of the swap market, when the official rate is flexible while the swap rate is fixed, or when both rates are flexible, the welfare consequences involved are the same as those under a unified floating rate regime. China's exchange rate unification through a floating rate regime therefore does not upset government welfare but has compelling benefits resulting from the removal of multiple practice. Numerical simulations show that, given the parameters of the Chinese economy, a flexible rate regime is favourable since it causes less loss to the government than a fixed rate regime. Furthermore, in moving to convertibility, a flexible rate regime is a sensible choice for maintaining the economy's competitiveness. Given that a systemic worsening of competitiveness would undermine the balance of payments position, ultimately leading to the government aborting convertibility, choosing a flexible rate regime has particular relevance for the credibility issue. In the model set-up, China's choice of a managed floating rate reveals that it places a relatively higher weight on competitiveness than on inflation. This is a very important attribute of China's exchange rate policy from which profound implications may flow. For one thing, this means there is a strong supply orientation in China's exchange rate decision that calls for attention. It also provides a useful indicator for possible changes in China's exchange rate when medium to long-run competitiveness of Chinese goods changes.