WITH the rapid depreciation of yuan in the foreign exchange market in China, will the Chinese Government devalue the official exchange rate according to the expectations of the market? The question has perplexed China traders, local officials, bankers, state enterprise managers and ordinary citizens. The central government has repeatedly indicated its commitment to merge the two exchange rate systems (the official and swap market ones)and introduce convertibility of yuan as a way to prepare China for its membership of GATT.
This means China will, sooner or later, devalue its currency to eliminate the widening gap between the official and swap market rates.
For those who hold or have access to foreign currency, this represents a government-guaranteed business opportunity. If they hold on to their foreign currency or increase its stock, they are guaranteed a higher yuan income than present official and market exchange rates.
This strong profit incentive has led foreign trade firms, local branches of state banks, other enterprises, officials and people in the street to join in a widespread scramble for foreign currency, and has resulted in a massive withdrawal of foreign currency from the Chinese national network of swap markets.
One may say the Chinese Government's eagerness in expressing its determination to rejoin GATT and to pursue a market economy constitutes the driving force behind the deterioration of the swap market rate of yuan from about US$1 to seven yuan in November to as low as US$1 to 8.8 yuan in early February.
The reform in the foreign trade system and foreign exchange retention system in 1991 has put 80 per cent of China's foreign currency earnings distributed outside the central government (40 per cent of the total) in the hands of a small number of foreign trade firms.