Does China have two currencies? If yes, then how is it affecting the economy?

economy : Does-China-have-two-currencies-If-yes-then-how-is-it-affecting-the-economy

Answer by Jai Parimi:

  • Yes In the past, China had dual currency & dual exchange rate.
  • No In the present, China has single currency & single rate regime.
  • Maybe in future, China could be dual currency & dual exchange rate.

Dual Exchange Rate:

  • A situation in which a currency has two official exchange rates,
    • one pegged to another currency and
    • the other floating.
  • Each is used for different things. The exchange rate for money used for sectors seen as essential, such as food, is fixed, while "non-essential" sectors are allowed to float.
  • A dual exchange rate allows a country to devalue its currency to reflect market realities without the pain of high inflation that usually accompanies severe devaluation.
  • Critics allege that a dual exchange rate is less efficient than a straightforward devaluation and acts as a tariff on industries the government sees as luxuries.

History of Dual Exchange Rate:

  • Dual exchange rate comes with it's own set of advantages and disadvantages.
  • In 1980's and 90's China operated two distinct–and highly divergent–exchange rates.
    • One overvalued official rate,
    • Other a market rate set by foreign and domestic businesses trading in currency swap centers,
    • Then there was also a black-market rate set by stall-holders in places where tourists congregated, like Beijing’s Bar Street in Sanlitun.
  • In 1994, China unified its two rates at the swap-market rate of 8.7 to the dollar–much weaker than the official rate of 5.8 to the dollar. At the same time, China abolished the Foreign Exchange Certificates.

What are Foreign Exchange Certificates?

  • Along with dual exchange rate regime, there were also two types of Chinese currency.
  • Foreigners were not allowed to own renminbi, literally “the people’s money.”
  • Travelers were supposed to exchange their hard currency for Foreign Exchange Certificates at the Bank of China, and use them at designated tourist hotels and the famous state-run Friendship Stores that sold hard-to-find imported goods like 555 cigarettes and Johnnie Walker whiskey.
  • But the system started to break down as China’s economy opened and private enterprise flourished.
  • China now had one currency and one exchange rate.

Source: The Evolution of the Renminbi Exchange

Does China have two currencies? If yes, then how is it affecting the economy?

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