The Role of the Black Market in China’s International Financial System

Yates, Amy E. | January 1, 1986

The dichotomy between China’s political theory and its administrative reality is nowhere more apparent than in the system China has developed to manage the inflow of foreign reserves into the country. In order to avoid disturbing the domestic economy, the government developed an elaborate two-tiered currency system. In addition, the government issued a set of Foreign Control Regulations which placed restrictions on the use of exchange. The regulations purported to place the use of foreign exchange under a “unified national plan.” In reality, however, beyond the reaches of the officially promulgated regulations, a thriving black market for foreign currency, foreign goods, and Foreign Exchange Certificates (“FECs”) has developed, over which the PRC government does not exercise any control. This Comment will examine the realities of the Chinese international financial system by going beyond the theoretical operation of the Chinese two-tiered banking system. The Comment will focus on the function of the black market in facilitating international trade by examining the reasons for the black market’s existence and the mechanics of its operation. It is hypothesized that the Chinese government tolerates the operation of the black market because it provides the Chinese consumer with a channel through which to acquire foreign durable goods, without the Chinese government having to expend foreign reserves to finance the transaction. Finally, it will be argued that, despite China’s current use of the black market as a means of acquiring many foreign imports, the future market in China for United States manufacturers and exporters holds great potential.