View from City Road: Too early for Chinese cheer

Overseas investors should not yet cheer too loudly about the Chinese government's reform of its dual exchange rate system. The lack of information yesterday threw China's own black market into a state of turmoil.

It is too early to say for certain whether the changes represent a decisive further move towards the liberalisation of financial markets or a streamlining of an increasingly eccentric system of foreign exchange controls.

The old system involved two exchange rates. Foreigners who wanted Foreign Exchange Certificates to buy airline tickets and investments had to exchange their money at the official rate of 5.7 yuan to the US dollar. This was also the rate at which state-owned enterprises were allowed to exchange money to buy imports of plant or components.

The other rate - about 8.7 yuan to the dollar - was applied on the 'swap' and black markets for other transactions, including the repatriation of profits.

By aligning the official exchange rate with the market-driven one, implementing an effective devaluation of a half, the reform may remove a source of discrimination against outside investors. However, it does not yet mean complete convertibility of the yuan for all types of transaction.

A system of foreign exchange control will remain for Chinese residents and businesses, and the devil is in the detail. But the changes look like a victory for Zhu Rongji and the Chinese reformers, and should therefore be encouraging for investors tempted by China's sky-high growth rates.