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RMB Denominated Settlement Attempted to Maintain Foreign Exchange Value (1968 - 1976)


 

In the late 1960s, currencies of 13 countries including U.S., UK, Federal Republic of Germany, Switzerland, France and Netherlands circulated or basically circulated in international trade settlement. Currencies of major Western capitalist countries were used for quotation and settlement in China's foreign trade, but China stopped using the US Dollar in import and export after December, 1950 when the U.S. illegally froze China's assets in the U.S. In 1960s, China mainly used GBP for collection and payment of foreign exchange in its foreign trade with capitalist countries. More than half of the trade was carried out in GBP, which was followed by HKD, and rouble was used in trade with the Soviet Union and other socialist countries for accounting and settlement.

In 1960s, although the fixed exchange rate system was implemented, the USD-centered Western currencies were in intense turbulence because of frequent economic and financial crisis in Western countries. In November 1967, GBP dramatically depreciated, causing a chain reaction with currencies of about 30 countries and regions depreciating similarly. Confronted with the Western currency crisis, Bank of China worked out counter-measures in March 1968, proposing RMB denominated settlement for import and export transactions with Hong Kong and Macau, in order to reduce foreign exchange risks and protect national interest. On April 12, the State Council decided to embark on the trial of RMB denominated settlement method in China's foreign trade with Hong Kong and Macau as of the Spring Canton Fair in 1968.

Trial of RMB denominated settlement means foreign trade contracts were signed with RMB as the denominated currency. That is to say, goods exported from China were priced in RMB, payment was settled in RMB and the foreign buyer could make payment with foreign currencies based on the agreed RMB exchange rate. Goods imported to China could also be denominated in RMB. The main purpose of the trial of RMB denominated settlement was to maintain the value of China's export foreign exchange earning, thus avoiding and reducing losses in China's foreign exchange due to devaluation of foreign currencies. The trial was not for international circulation of RMB, as RMB was still not allowed to be carried abroad or to be exported as a mean of payment or reserves.

After the mainland export to Hong Kong was shifted to RMB denominated settlement, Hong Kong merchants had to pay with RMB converted from foreign currencies on the current quotation of the Chinese central bank, thus undertaking the risk of exchange rate variation which affected the trade. To solve this issue, Bank of China adopted such methods as RMB purchase in advance and forward RMB appointment in the actual implementation.

The scope of trial of RMB denominated settlement expanded to Western European countries gradually. After the Spring Canton Fair in 1969, the RMB denominated settlement method started with oceangoing export with UK, with 17 transactions completed at Tianjin Port alone. On the Autumn Canton Fair in 1969, the trial method further extended to China's trade with UK, France, Switzerland, and Federal Republic of Germany. In the RMB denominated settlement with European countries, Bank of China London Branch was responsible for procedure handling as well as sale of RMB and absorption of RMB deposits.

Premier Zhou Enlai provided great support to RMB denominated settlement, giving repeated instructions, "RMB is not going abroad, it is not circulated even in Hong Kong or Macau", "China's trial of RMB denominated settlement in trade with UK, France, Switzerland, Federal Republic of Germany and other capitalist countries is a success. We are not forcing a way for RMB to go abroad. RMB is creditable and stable. It is inspiring to use RMB for settlement because it reflects the achievement of socialist development of China".

By 1973, the number of countries and regions trading with China in RMB denominated settlement (including contracted countries) reached 63, which was further increased to 120 in 1976. The business volume of RMB denominated settlement also grew significantly. The business volume of export increased from RMB 500-600 million yuan on the Trade Fair in 1970 to RMB 2.4 billion on both the spring and autumn sessions of the Trade Fairs in 1973.

It took nine years by 1976 from the trial to implementation of the RMB denominated settlement method. With intense turbulence of international finance and collapse of fixed exchange rate system for international currency during that period of time, China's RMB denominated settlement in foreign trade was a relatively favorable choice to avoid and reduce foreign exchange risks, to maintain the value of export foreign exchange earnings, and to enhance the international creditability of RMB.

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