China's modernization effort is making changes in the country's approach to international currency. The changes began in 1979 with the creation of special currency certificates for foreigners and have led -- almost -- to the establishment of a foreign-currency market.
Normally, in a socialist society, all foreign moneys pass to the government. It is unusual to have foreign exchange on sale. But today, a Chinese corporation can buy currency with the assistance of the Bank of China.
As part of its modernization effort, the government has been offering incentives to workers in industry, to farmers, and to factories. For factories, the incentive was letting them keep part of their exchange earnings -- only about 10 percent -- but nothing was permitted before. The idea is to make factories responsible for their own profits and losses. They are expected to use their 10 percent for any foreign-exchange needs, and what they don't use, they must sell -- at a profit, of course.
For some time, the People's Republic of China has had a quota system for distributing foreign exchange that collected in the government pot. Access to this pot was established by a priority list. Industries with import needs authorized by the state plan had no problem getting exchange. Others did; they might meet the quota, but nonessentials were low-priority items. The well might run dry before they could lower the bucket.
This quota system still functions. Those high on the list continue to get funds from the government, paying the regular rate of exchange. Now, those farther down the list can make a choice: wait their turn for regular funds, possibly upsetting their production schedule, or buy exchange on the new market, where it will cost a bit more.
When the seller decides to part with a portion of his 10 percent, he sets the price for the deal. The Bank of China acts as broker, finding a buyer and collecting from each party a quarter of a percent fee. The bank does not buy or sell exchange on its own.