Note, this entry was written as a comment posted on this thread over at Coming Anarchy. It’s only tangentially related to the discussion on US Foreign Debt over there, but I thought it was good enough so I should post it here as well.
Saru: You said, “In order to keep the RMB pegged to the dollar, the Chinese central bank must intervene in the currency markets to counter upward or downward pressure on the RMB against the dollar.”
It’s important to remember that the primary way that China controls the exchange value of the RMB, as compared to how other countries attempt to control their own currency, is by strictly regulating the export of RMB. You may remember how when we were in China and exchanged foreign currency for RMB we were issued a receipt? Upon leaving China again, without that receipt we would have been completely unable to sell back any excess RMB we had, and if we were carrying a large amount of Chinese currency, we would have gotten into serious trouble as customs. Chinese law only allows for the export of amount of currency that they consider to bepocket change, and they regulate this so carefully that even Chinese tourists going abroad are only licensed to exchange a fairly limited amount of funds.
By keeping virtually all Renmenbi inside China the government manages to keep an independent market for their currency from developing. I’m sure you also remember the black market currency traders that we used in Urumqi? They are the direct result of China’s currency policy. Because RMB cannot be exported or traded by private citizens, Chinese businessmen (apparently especially in the Shenzhen area, according to what we were told) who want to invest abroad, or make large foreign purchases, may have to acquire foreign currency indirectly.
For the others, I’ll tell the story briefly. When Saru and I (and Younghusband as well, but he didn’t actually make it on the bus to Almaty with us) were at the international bus station in Urumqi we were greeted outside the building, in a neighborhood where the signs were more likely to be writtein in a Cyrillic-script language than in the local Chinese or Arabic alphabet using Urumqi language, by a throng of dark coated men of dubious nationalities standing around the crowded parking lot fanning huge stacks of RMB in the open air. Seeing a pair of confused white boys, they immediately jumped into business mode and started offering to buy our US$ in a variety of incomprehensible languages. Although I didn’t have many dollars on me (having come from Japan, and already been in China for three weeks besides) I did exchange the little I had left, as did Saru. Since we were going to Kazakhstan later that day, I also asked around and found one fellow who had some Kazhak Tenge in his wallet and was grudginly willing to sell them to in exchange for more Chinese RMB.
Later on we got an explanation from our Uyghur friend who had been helping us arrange our transportation. Black market currency traders like the ones we met operate throughout market areas along the Chinese borders, where foreign currency is more easily avaliable, and then buy US$ at a better exchange rate than the bank. It might seem like a money losing proposition, but then once they have accumulated a decent amount of money (about $1 million) they hire a courier to take it to the rich areas of Eastern China. The usual method is to pay a commericial airline pilot to carry the money with him as he makes his ordinary flight, in exchange for a sizable fee of about $5000. When the money reaches the East, it is bought by businessmen at far higher rates than the official market value, because as I mentioned before, this is only way for them to acquire large volumes of foreign currency without a difficult to obtain government license.
As a footnote, when we got to Almaty I was astonished to see little currency trading stands all over the place, sometimes within only a couple of blocks of each other in the busier areas. Each one had a slightly different selection of advertised currencies, but they all took Dollars, Euros, and Rubels plus a few others. There were none that took Chinese RMB.