In the early years of the People's Republic, to break the US-led sanctions, China actively engaged in trade with socialist countries such as the Soviet Union and Eastern Europe. At the same time, China also traded with Western Europe and Japan through semi-official channels. When Sino-Soviet relations soured, especially after the public breakdown of Sino-Soviet party relations in 1960, China's trade with the Soviet Union and Eastern European countries shrunk rapidly, and its main foreign trade partners shifted to “capitalist” countries and regions. This remained the case despite considerable domestic turmoil throughout the 1960s.
As its pattern of foreign trade pivoted towards the West, trade officials within the early PRC bureaucracy were once again exposed to the considerable political, commercial, and exchange rate risks that came with trading with market-oriented countries. For them, this privatization and de-centralization of risk contrasted unfavorably with the state-to-state agreements reached between China and members of the Socialist Bloc for much of the mid-1950s. Yet Chinese foreign trade with the West and non-aligned countries also represented its main (and thin) margin of foreign exchange, which the country relied on to industrialize following the breakdown of Sino-Soviet relations.
Chief amongst the risks is the difficulty of evading the US dollar and American financial oversight in its trade dealings, a difficult task during the heyday of Bretton Woods framework, made more so by Chinese trade with the US’s closer allies (Canada and Australia) in the early 1960s. China’s choice of replacement currency, the British Sterling, formed a source of anxiety from the very beginning due to its unilateral devaluations, which not only affected Chinese trade through Hong Kong, but also its settlement mechanisms with multiple newly independent countries in Southeast Asia and the Middle East.
Yet for officials and bankers handling Chinese foreign trade, the risks were not one-sided; shifting political priorities in Party politics during late 1950s and 1960s made themselves felt not only through personnel upheavals, but also in the mechanics of trade settlement – China’s 1968 switch to denominating its export contracts in Chinese Yuan (Renminbi) being the most well-known example, but by no means the only case. On a daily operational setting, the meagre, agrarian-based (and thus seasonal) exports that China was able to muster during these years had to be balanced against growing demand for foreign machinery and at times grain, which in turn required local bank branches and their superiors to settle or delay foreign claims judiciously.
While some of these phenomena have been included in general surveys of Chinese foreign trade, they were not viewed under its own category of trade settlement, nor through the perspective of risk management. Drawing from archival sources from People’s Bank of China’s Foreign Business Management Bureau, Bank of China Shanghai Branch, and regional archives in Guangzhou, Zhanjiang and elsewhere, this paper offers a thematic discussion of foreign trade settlement in the early PRC era (1950-1975), with emphasis on its attempt to mitigate political, commercial, and operational risks via its choice of correspondent banks, currency for trade settlement and related arbitrage, as well as foreign currency reserve management.
Why is risk management a useful angle to approach history of Chinese trade settlement in this era? I argue as state employees working at the intersection of socialist and capitalist societies, it was politically more prudent for them to manage and curtail perceived risks through operational efficiency and diversification, than branching out to potentially dubious new markets or business partners. It could also – albeit partially – explain the Chinese attachment to British Sterling as the key currency for settlement well into early 1970s, and offer a glimpse on the mode of thinking for state management of cross-border payments in contemporary China.
Dong Yan is Assistant Professor at the School of Economics at Shanghai University of Finance and Economics
