Thirty-odd years ago, as Deng Xiaoping’s reforms got under way, China had two currencies. Foreign currency was scarce, so they needed to control tightly the number of people who could get it. Their answer was to have two currencies: the ordinary yuan, which could not be exchanged for forex and had no value outside China, and the exchangeable yuan. The exchangeable yuan was scarce because China was still a poor country and could not afford much foreign currency. Exchangeable yuan were what you were given if you were an exporter for what you sold abroad. If you wanted to import anything, you needed “exchangeable yuan†and, of course, if tourists changed their country’s currency, they got “exchangeable yuanâ€. So the only way to get exchangeable yuan and therefore foreign currency was to export something. You could sell something to a tourist who had exchangeable yuan; you could both go to jail if you did the transaction in forex.
In theory the two kinds of yuan were equal in value, but you can see there were definite advantages in having exchangeable yuan, so the system was under pressure. It worked fairly well in the cities where there were many foreign visitors; coastal business centres such as Guangzhou and Shanghai. A tourist might not notice the difference between the two currencies. S/he could buy goods for 3 yuan, pay with a 5 yuan note and get 2 yuan change – either kind of yuan, because he could buy just as much with the “people’s money†as with the “exchangeable†yuan. But further from the coast and outside contacts, a different rate of exchange between the two applied. In major inland cities, such as Chengdu or Xian, if you paid 5 “exchangeable†yuan for 3 yuan of goods, you got at least 4 “people’s yuanâ€, and maybe as much as 7, change. They were accepting your “exchangeable†yuan as worth two “ordinary†yuan. The Chinese are sharp business people, so they were probably getting a better rate than that somewhere for every “exchangeable†yuan.
That was in major cities in a country where the government had much more control than ours ever did. Government still bought some 90% of everything produced in the country and was only just beginning to allow private traders to export directly, without selling their goods to a government agency which had, till then, controlled all foreign trade. Government could not control the exchange rate between the “people’s yuan†and the “exchangeable yuan†in major cities. I leave you to guess what the exchange rate between the two might have been. You could probably have bought yourself a wife in Tibet or the remoter corners of Xinjiang for a few “exchangeable†yuan. And I do mean a wife, not a one-night stand.
If your ears are not more than 2 metres above the ground, you must have heard that the black market price of “bond dollars†is already widely known and that rate would operate tomorrow if the bond notes were introduced then. As for the day after, that is anyone’s guess, but we would see them losing value much faster than the zimdollar ever did. In a short time, they’d be printing larger and larger denominations of “bond notes†which will always be worth less than their weight in toilet paper. Before very long, if we let them foist this nonsense on us, they’d have all the real money in the country and we’d only have paper you couldn’t even blow your nose on.
And you’ll see it start a soon as you buy $11 worth of groceries with a real $20 note; you’ll get 9 “Bond $†change and not be able to buy a kilo of tomatoes with that.
We can’t let that happen.
Post published in: Business