China Introduces Currency, Tariff Reforms for GATT Bid

WITH New Year's bells, China inaugurated a set of moves designed to enhance its bid to reenter the General Agreement on Tariffs and Trade (GATT).

Beijing created a market-based foreign exchange rate that moves the currency its first step toward convertibility. Import controls were also lifted on 283 categories of goods in the final week of 1993.

The first day of the year marked the end of China's confusing dual-rate foreign exchange system and state-set exchange rates. The government stopped issuing Foreign Exchange Certificates (FECs), an English-language scrip issued to foreign individuals and businesses. Beijing will gradually withdraw them. About $350 million certificates in circulation were sustained at the artificial rate of 5.8 to the dollar. The new, market-determined rate of 8.7 is set by already existing swap markets, where 80 percent of foreign trade businesses have been buying China's regular currency, the renminbi.

A few foreign companies with investments set by the official rate could see their assets devalued. But since most foreign invested businesses obtained Chinese currency at swap markets and not banks, analysts doubt the change will harm them in the long term.

``It's part of a beneficial move to make a good business environment,'' says Ann Stevenson, Beijing director of the U.S.-China Business Council. ``It reduces the meaning and function of bureaucrats who run things, and that's generally for the good.''

Many state-run enterprises that had enjoyed what amounted to subsidized imports, however, will have to buy from overseas at the less advantageous rate.

Changes to boost exports

Although the new rate should help China's exports by lowering their prices overseas, officials vehemently deny that China intends to gain unfair benefits from the unified currency.

``It is groundless to claim that China is attempting to promote dumping by controlling the exchange rate,'' said Wu Yi, Minister of Foreign Trade and Economic Development through the official Xinhua News Agency. The new exchange system will ``play a positive role in resuming China's signatory status in GATT,'' she added.

China tried to balance the advantages it gained through the new system by lifting controls on 283 categories of imports. At the same time, however, it slapped more restrictions on imports of machinery and electronics.

Fearful of losing control of its currency, the government still limits the amount of foreign cash Chinese companies are allowed to hold. Although one official from the Bank of China, the country's foreign exchange bank, says privately that full convertibility could come in two years, most analysts predict that it will take three to four years. ``I don't think the government has a schedule,'' the official says. ``The road to convertibility is the one we must travel, but we must see how this first step goes.''

So far, it has gone smoothly. The exchange rate in swap markets has held steady at around 8.7 to the dollar since the change was announced.

But the Chinese government's slow release of information on the rate change stoked confusion. Starting Dec. 29, it offered a series of unclear news releases on the imminent demise of the FEC, but no regulations. Holders of FECs, fearing their money would lose up to 40 percent of its value on Jan. 1, raced to convert their FECs to dollars or to spend them at stores. Only just before midnight on Dec. 31 did China finally announce through state-run news media that holders of FECs could continue to exchange them at the 5.8 rate after the change went into effect.

``Like most things here, we find out months later what happened yesterday,'' gripes a Western banker in Beijing.

New taxes added

Confusion among businesspeople was not limited to the new exchange system. A value-added tax went into effect Jan. 1, eliminating some business and commerce taxes but tacking a 17-percent levy on sales of manufactured items, both domestically produced and imported.

``We have a number of deals being held up until our Chinese partners get a better handle on how the tax and foreign exchange impact will affect them,'' says a United States trader in Beijing.

Higher prices for imports and higher taxes passed on to consumers will fuel inflation, which increased 25 percent last year in China's booming coastal cities. This year, coal subsidies and caps on commodity prices will be lifted, which will exacerbate the problem. The government has insisted it will limit inflation to 15 percent in the cities this year, but the nation's broad slate of economic reforms is pushing in the other direction.