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Currency Exchange Rates

Freely floating currencies on the open market change daily in response to a endless combination of economic, market, country, internal and worldwide forces.

China(PRC) and Hong Kong are two exceptions. They do not allow their currency to float. Rather, they tie it to the U.S. dollar. This means the exchange rate versus the U.S. dollar is changed very infrequently. When it is changed, it tends to be very significant. The conversion rate was last changed by the government in 1994. Other currencies will float versus the Chinese RMB in relation to their respective change to the U.S. dollar. Note a number of countries also set their exchange rate to the U.S. dollar and therefore will not float versus the Chinese RMB. Among these currencies is the Hong Kong dollar.

See pictures of the Currency.


AN EXCHANGE RATE THEORY FOR THE PRC:

While engaged in a business case pursuing a joint venture in the PRC a few years ago, I debated the exchange-inflation relationship with a financial vice president of a large corporation. It became much more than interesting debate and traversed a couple of months elapsed time. The essence of the debate is pretty much summarized as follows:

In a free market society where currency is openly bought and sold, the local country inflation is largely offset by the change in exchange. This is true to the extent that there is also world wide inflation. Assuming worldwide inflation is perhaps best represented by the rate of U.S. inflation, then the net impact over time of inflation and exchange is the rate of U.S. inflation. This is a short version of Exchange rate fundamentals . It excludes intervention of governments to control their currency or to limit a precipitous downfall.

Now here is a complicating factor: The PRC does not allow it's currency to float on the open market. The result of this is that the above theory may work relatively fluidly in an open market, it will not occur in perfect lock step with the PRC. Over time however, rates must adjust. During a period of high inflation, a country with a fixed exchange rate will use foreign currency reserves to hold their rate steady until those reserves are exhausted. An exchange rate change in this instance is inevitable, it is just a matter of when. When this occurs, the rate adjustment will be significant.

The PRC manages this constant exchange rate by the level of foreign exchange they hold. As a result the exchange rate has remained very stable in the past few years, despite inflation that remains in low double digits.


Things you should know about currency and exchange before you go for the first time:

Contrary to many other countries, the conversion rate is the same(almost the same) wherever you convert your currency, whether it is a bank, hotel or currency exchange booth. While the official rate is 8.3 RMB to 1USD, the actual exchange rate will receive in converting cash is slightly lower than 8.1 Use credit cards wherever possible and you will receive a rate nearer the official exchange rate.

Make sure you keep your receipt from the currency exchange. Because the Renminbi is not freely floated, you can not sell back excess Renminbi without the receipt. Upon departure at the airport, turn in you excess Renminbi along with the receipt when you bought Renminbi.

A common mistake is to confuse the Hong Kong dollar for the Renminbi. The Hong Kong dollar has more value, so either put them away when you arrive in country or recognize the difference.



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