China woke yesterday totally confused. The previous evening it had learned that the two-tier exchange rate regime, whereby foreigners have had to pay an inflated price to buy foreign exchange certificates (FECs), was being scrapped. No longer would the fixed rate of 5.7 yuan to the US dollar hold; a rate much nearer the 8.7 yuan that has been on offer at the country's restricted 'swap' markets is likely to emerge as the market-driven rate next week. But nobody was quite sure what this devaluation will mean in practice. Not even the country's black marketeers.
The Bank of China, the main bank handling foreign currency transactions, was not offering much help; its computer was 'down' for the day. Nor were the People's Bank of China, the State Council or the State Administration for Exchange Control prepared to explain exactly how foreign companies and individuals will be affected by the changes.
At the World Trade Centre's Gourmet Corner delicatessen - Peking's gastronomic haven - German salami, carrot cake and all other products were still priced in FEC, with a 30 per cent surcharge if you wanted to pay in renminbi (RMB - people's money), the ordinary currency used by Chinese. At the Wellcome supermarket across the way, separate cashiers were still ringing up different prices for those paying in FEC and RMB. The first casualties will be the tourists and foreigners who suddenly discovered yesterday that the wads of FEC they had already purchased at the fixed exchange rate would be worth about a third less from tomorrow.
Hotel exchange desks and the state- owned Friendship Store cashiers yesterday refused to change FEC back into hard currency. Bank of China branches were full of people desperately trying to get rid of FEC.
For the managers of foreign-owned businesses with large deposits of FEC in Chinese bank accounts, huge sums are at stake. Many companies yesterday were under the impression they probably had until close of business today to convert FEC back to hard currency. The head of the Peking office of one of the US airlines said his understanding was that money in an FEC account today could be changed at the old rate for a month.
The State Administration for Exchange Control suggested that the grace period could be up to April, but he could not be certain.
British Airways welcomed the decision. Like all foreign airlines it has been allowed to sell tickets only for FEC or on credit cards.
The effect on the country's inflation rate is also not clear. Most foreign goods sold in China have been bought at the swap market exchange rates so, in theory, these should not now experience price hikes. But, with inflation above 20 per cent in the cities, companies may use the exchange rate changes as a pretext for more price rises.
While FEC notes are likely to become collector's items, China is still a long way from having a convertible currency.
Foreign-funded companies will continue to need permission to buy the forex necessary to run their business. Chinese enterprises will have to show import contracts or payment notes of overseas financial institutions to purchase hard currency. Individual Chinese will only be allowed to buy hard currency if they are going abroad.
View from City Road, page 27