China’s approach to foreign exchange, like many of the decisions of the country’s public authorities, could best be described as a banana-skin policy. That is to say: the government has no policy. It simply keeps doing the same thing for as long as possible, until it slips, suffers a nasty bruise, picks itself up and tries something else.
In the early 1980s, a US dollar bought you two renminbi. That was the fixed rate in the official market, anyway; the Chinese currency traded at about five to the dollar in the black market. Since then, Beijing has been forced by the black market to adapt, whenever the official rate falls out of line with the underground exchanges.
To maintain an overvalued exchange rate, China in the mid-1980s introduced a foreign exchange certificate to ration foreign currency. Only approved users would receive a ration. But FECs quickly took on a life of their own; unofficial trading of the certificate boomed. Black market prices fluctuated between 60 and 80 per cent of the official exchange rate. Even at the central bank, where I was working at the time, staff members had to go to the black market to buy dollars to pay tuition fees at foreign universities.