Xiao Anmiao: A Historical Investigation of Currency in the Shenzhen Special Economic Zone [1] During the Early Period of Reform and Opening-up [2]
The Special Zone Currency (SZC) was a type of local currency designed to be freely convertible with foreign currencies, which the state planned to issue in the Shenzhen Special Economic Zone (SEZ) at the start of the Reform and Opening-up period. The relevant proposals underwent many twists and turns; after repeated weighing and cautious consideration, the Central Authorities ultimately decided not to implement them. When existing scholarly works mention the SZC, they mostly focus on the impact of "opening up" therein, while rarely noting the issues in central-local relations reflected by this historical process. In fact, one of the most important characteristics of Reform and Opening-up was the appropriate devolution of power [1] by the Central Authorities to local governments, thereby stimulating the "two initiatives" [2] of both the center and the localities to drive China's rapid economic development. A historical study of the currency issue can precisely reflect the complex relationship between the center and the localities.
I. Guangdong Province First Proposes a Special Zone Currency
In the late stages of World War II, the Bretton Woods system established the dominance of the US dollar, which replaced gold as the primary international foreign exchange reserve. The dollar was pegged to gold at a fixed price, and other national currencies maintained fixed exchange rates with the dollar. This gold exchange standard determined that the currencies of most European and American countries were not freely convertible. After the 1970s, the Bretton Woods system collapsed. International currency shifted from a gold exchange standard to credit money backed by a nation's products, technology, and other assets. As the prices of products and technology are influenced by market supply and demand, international currency exchange rates subsequently shifted from fixed to floating regimes.
Turning to China, during the period of the planned economy, the Renminbi (RMB) could not function as a means of international payment. After the process of normalizing Sino-US relations began, foreign trade activities between China and capitalist countries increased rapidly. The differences between two economic systems, two markets, and two currencies became increasingly prominent, and the reform of the RMB was gradually placed on the agenda. On January 4, 1973, Li Xiannian proposed at a National Foreign Trade Work Conference the need to change the pricing issues between the two different markets: "International market prices and domestic market prices are two entirely different things"; "applying the domestic principle of 'cost plus profit' pricing to the international market is harmful in practice and illogical in theory"; "the international market is guided by supply and demand and governed by the law of value [3]. In doing business with capitalists, we must learn to use this law so that foreign trade work benefits national construction."
That year, the RMB exchange rate began to adopt a "basket of currencies" weighted average calculation method. However, because trade weights changed annually and the weights of certain currencies were adjusted manually to maintain RMB stability, the weighted average method carried considerable subjectivity and could not truly reflect the state of foreign economic trade. More importantly, the RMB exchange rate issue was essentially a price issue, primarily manifested in the relationship between domestic and international prices. Under a highly centralized planned economy, domestic prices were determined by state plans, while the prices of import and export goods were determined by the international market. The price ratios of many consumer goods and labor costs, as well as those of import and export commodities, differed vastly between domestic and international markets, creating a "dual-track" price system [4]. The implementation of the "basket of currencies" method did not eliminate the price differences for the RMB between the domestic and international markets; the two different price systems reflected two different economic systems. Clearly, a thorough resolution of the RMB exchange rate issue required deeper economic reform.
On May 9, 1977, the National Conference on Learning from Daqing in Industry [5] proposed that the national economy should initiate a "new situation of a comprehensive leap forward." On July 26, the CPC Central Committee Political Bureau heard and discussed a report from the State Planning Commission titled "Request for Instructions on the Plan for Introducing New Technology and Importing Complete Sets of Equipment." This report proposed that "in the next eight years, in addition to rushing the completion and commissioning of projects under construction from the $4.3 billion import plan approved in 1973 (the '43 Scheme' [6]), we will import another batch of complete sets of equipment, individual machines, and technical patents totaling $6.5 billion." In November, the "Main Points of the Report on the Economic Plan" submitted by the State Planning Commission planned to "increase the introduction of projects based on the established $6.5 billion scheme, importing a total of $15 billion in new technology and complete sets of equipment within eight years." To this end, the Central Authorities first implemented several reforms in foreign trade. On April 22, 1978, the Ministry of Foreign Trade announced the implementation of six types of trade methods that were "previously prohibited but now permitted": compensatory trade, processing with supplied materials, processing with supplied samples, assembly with supplied parts (jointly known as "the three-plus-one" [7]), brand-name manufacturing for foreign trademarks, cooperative production, consignment, and installment or deferred payments. On December 15, Minister of Foreign Trade Li Qiang, while visiting Hong Kong, announced the removal of the two "forbidden zones": government borrowing from abroad and the introduction of foreign investment.
By the 1970s, Hong Kong had developed into an important manufacturing hub, shipping center, and world financial center in Asia. Its experience of economic takeoff piqued the interest of the Central Authorities, becoming an important object of study and inspection. From April to May 1978, the CPC Central Committee and the State Council dispatched an economic and trade inspection group to Hong Kong and Macau, led by Duan Yun, Vice Chairman of the State Planning Commission. The group briefed the CPC Guangdong Provincial Committee and the Central Committee Political Bureau on the development experience of Hong Kong and Macau, proposing that Bao'an and Zhuhai—which bordered the two territories—be built into "production and export processing bases with a considerable level of integrated industry and agriculture," "tourist areas to attract Hong Kong and Macau visitors," and "new types of border cities" (the so-called "Three Objectives"). They also suggested "utilizing Hong Kong and Macau to vigorously develop the export processing and assembly business." The inspection group’s suggestions were highly valued by all parties.
The Guangdong provincial government possessed a high level of enthusiasm for reform. Due to the vast economic disparity between Hong Kong and Shenzhen, Guangdong had long faced severe pressure from illegal border crossings and flight [8]. According to Fang Bao, Deputy Secretary of the Huiyang Prefectural Committee and Secretary of the Bao'an County Committee, the per capita income of farmers in Hong Kong's New Territories in 1978 was over 13,000 HKD, while the annual per capita distribution for farmers in Bao'an County was only around 100 RMB—an income gap of dozens of times. Popular local sayings at the time included: "Tilling the soil for a whole bitter year isn’t worth someone else’s eight cents" (referring to the cost of a stamp to ask relatives in Hong Kong to wire money) and "Working a month on the mainland isn't worth a day in Hong Kong." From 1954 to 1978, a total of over 565,000 attempts at illegal crossing occurred in Guangdong province, with over 146,800 people successfully fleeing. Bao'an County, adjacent to Hong Kong, was undoubtedly the hardest hit. In 1978, illegal crossings in the county were more serious than ever, with 15,300 attempts and 8,000 people fleeing. Before the establishment of Shenzhen as a city, the population of Bao'an County was less than 300,000, yet the number of Bao'an natives residing in Hong Kong and overseas was reportedly as high as 350,000. These conditions were jokingly described as "uneven roads, unreliable phones, dim lights, and non-stop escapes." To alleviate this pressure, Guangdong leaders such as Xi Zhongxun [9], after hearing the inspection group's briefing, proposed learning from the economic takeoff experience of the "Four Asian Tigers." At the Central Work Conference held in late 1978, Xi Zhongxun further proposed that the Central Authorities allow Guangdong to absorb capital from Hong Kong, Macau, and overseas Chinese, and to carry out "the three-plus-one" trade.
The Central Authorities' vision for economic structural reform underwent a process of change. For a period after the "43 Scheme" was proposed, the center mainly hoped to achieve modernization by continuously expanding the scale of foreign technology imports; they urgently needed a large amount of foreign exchange but had not yet considered issues such as economic structure, markets, or currency reform. In early 1979, Chen Yun was the first to propose the issue of adjusting and reforming the economic system, stating: "It is not necessarily the case that as the planned economy portion increases, the absolute amount of the market economy portion must shrink; both might increase correspondingly." Chen Yun discussed this vision with Li Xiannian. On February 22, while hearing a report from the leadership of the People's Bank of China on the national branch managers' meeting, Li Xiannian also pointed out: "Combine the planned economy with the market economy, with the planned economy as the mainstay; the market economy is a supplement—not a minor supplement, but a major one."
Following the "Western Leap Forward" [10], the Central Authorities began implementing the policy of "adjustment, reform, rectification, and improvement" for the national economy. "Adjustment" did not mean a rejection of "reform," but rather further "reform" done better. During the Central Work Conference from April 5 to 28, 1979, Deng Xiaoping explicitly stated: "Guangdong and Fujian shall implement special policies to utilize overseas Chinese capital and technology, including setting up factories." The conference passed the Decision on Several Issues Concerning Vigorously Developing Foreign Trade and Increasing Foreign Exchange Income, deciding that Shenzhen and Zhuhai would take the lead in trial-running "Export Special Zones." These Export Special Zones would, "in accordance with national policies and laws, allow overseas Chinese and Hong Kong/Macau merchants to invest directly in factories, allow certain foreign manufacturers to invest in factories, or allow the localities to set up joint ventures with them, with the localities utilizing foreign investment for urban construction." In May, Vice Premier Gu Mu spoke with cadres from the Guangdong Provincial Committee and Provincial Government, clearly stating: "To reform the system, we must study how to manage the planned economy while acting according to economic laws, practicing the combination of a planned economy and a market economy. Which things are to be subject to the planned economy and included in the plan? Which things can be arranged according to the needs of the domestic, international, and Hong Kong/Macau markets? In your dealings with Hong Kong and Macau, you should basically follow their methods. In running the Special Zones, we are still under the leadership of the Central and Provincial Committees; we won't turn into capitalists." Gu Mu's speech clarified the relationship between the Shenzhen Export Special Zone and Hong Kong/Macau: in economic terms, it would basically follow the Hong Kong/Macau model and implement a market economy.
According to the common practice at the time, export processing zones were generally very small and did not require the issuance of a new type of currency. However, from the very beginning, the Shenzhen SEZ was envisioned not merely as an export processing zone, but as a "window" for attracting foreign capital, technology, equipment, and management experience, and a "school" for training talent to be sent back to the interior. On July 15, 1979, the CPC Central Committee and the State Council approved in principle the Two Reports of the Guangdong and Fujian Provincial Committees on Implementing Special Policies and Flexible Measures in External Economic Activities. In its report, the Guangdong Provincial Committee proposed trial-running "Export Special Zones" in Shenzhen, Zhuhai, and Shantou, starting with "processing and assembly, light processing industries, and tourism, gradually accumulating funds before initiating projects with higher degrees of processing," and "focusing first on the construction of Shenzhen." On October 31, a symposium on Export Special Zones held by the Guangdong Provincial Committee concluded that the term "Export Special Zone" could no longer encompass the full scope of the undertaking; it should more accurately be changed to "Economic Special Zone." "While the Special Zone must primarily focus on factories and enterprises, it must also develop residential buildings and other economic ventures." "Residential areas will primarily be provided for scientists, investors, senior technical personnel, and overseas Chinese, creating a good environment for them to invest, work, and rest."
Due to a lack of experience in managing a market economy, the economic construction of the Shenzhen Export Special Zone at that time primarily referenced certain practices of the free port of Hong Kong. Taking the Hong Kong dollar (HKD) as a reference and issuing a type of currency that could circulate freely—a Special Zone Currency—was naturally an inherent part of the plan for constructing the SEZ. On November 6, 1979, Ye Jianying stayed at the Nanhu Hotel in Guangzhou. Guangdong provincial cadres, including Xi Zhongxun and Li Jianzhen, went to the hotel to report on their work and seek instructions. Ye Jianying pointed out that the Third Plenary Session of the 11th CPC Central Committee had determined that the Party's central task had shifted to economic construction, and henceforth we would concentrate our energy on modernization. The Central Authorities would give Guangdong special policies to establish the Shenzhen, Zhuhai, and Shantou SEZs. Ye also spoke with them about the future of Hong Kong and Macau. By linking Guangdong's "economic system experiment" with the future of Hong Kong and Macau, Ye Jianying encouraged Guangdong to undertake bold economic trials. On November 14, the Standing Committee of the Guangdong Provincial Committee proposed for the first time that consideration be given to the question of "what currency should be used in the Special Zones."
It should be noted that the proposal for a Special Zone Currency was both the result of the Guangdong local government's bold economic experimentation and the product of the Central Authorities' autonomous "loosening of constraints and devolution of power." Given the history of hyperinflation during the Kuomintang government period, the unification of the market under the RMB and the centralization of currency issuance power in the hands of the Central Authorities had long been an iron rule. However, with the advancement of Reform and Opening-up, even before Guangdong proposed the SZC, the State Planning Commission had submitted to the State Council the Several Opinions on Further Improving Friendship Stores, proposing that "the Bank of China issue RMB Foreign Exchange Certificates (FECs) domestically" to solve transaction issues in Friendship Stores [11]. The purpose of proposing the SZC scheme was to alleviate, to a certain extent, the contradiction between the domestic planned economy and the international market economy. But as the reforms in Guangdong, and specifically the Shenzhen SEZ, deepened, these contradictions gradually began to affect the relationship between the Central Authorities and the localities.
II. The Suspension of the Special Zone Currency Scheme
Guangdong and Fujian provinces implemented special policies and flexible measures, piloting Special Economic Zones (SEZs) characterized by "market economy as the primary focus." As "new things" distinct from the planned economic system, these zones inevitably faced irreconcilable issues with other regions still operating under the planned economy. As early as July 19, 1979, the CPC Central Committee and the State Council pointed out that "in the process of implementing special policies in Fujian and Guangdong, complex situations are bound to arise across various sectors," and required the "immediate organization of a coordination group to monitor the policy implementation in both provinces at all times, coordinate relations between relevant parties in a timely manner, and resolve contradictions as they arise."
The implementation of special policies directly led to the problem of foreign currency circulation. On December 17, 1979, while listening to reports from Guangdong and Fujian, Gu Mu [12] noted: "The feedback regarding Guangdong is currently very intense. In Guangzhou, Hong Kong dollars (HKD) are being traded on the black market; taxi drivers accept HKD, and restaurants accept them too. Children of high-ranking cadres from the military and local sectors in Beijing are running to Guangzhou to acquire 'dual-use' machines [13]." Gu Mu’s speech touched upon not only the black market trade and circulation of HKD but also the resulting "speculation and profiteering" between the "SEZs" and the interior. How was this to be solved? Wang Quanguo, then Secretary of the Guangdong Provincial Party Committee (at a time when first secretaries were appointed), argued during this symposium: "By issuing Foreign Exchange Certificates (FEC), we can prohibit the circulation of HKD."
On December 19, the People’s Bank of China submitted to the State Council the Report on Maintaining the Unified Market of the Renminbi and Prohibiting the Circulation of Foreign Currencies in the Domestic Market. It pointed out that following State Council approval for the Ministry of Foreign Trade to handle consignment sales of foreign cigarettes and alcohol in several large cities, the scope of foreign currency use had expanded daily, most prominently in Guangdong. This triggered several issues: it affected the unified RMB market and damaged national prestige; it impacted the RMB’s exchange rate against foreign currencies, creating black markets for currency trade; it corrupted cadres and the masses, debasing social mores; and it brought inconvenience to overseas Chinese and foreign guests. The report proposed: "The Bank of China shall issue 'Foreign Exchange Certificates' next year," and "all units currently approved to directly collect foreign currency shall no longer price or collect in foreign currency, but should switch to RMB pricing and collect FEC." On January 5, 1980, the State Council approved the report. On March 19, the State Administration of Foreign Exchange issued the Notice on the Issuance of 'Foreign Exchange Certificates' by the Bank of China, deciding to authorize the issuance of FEC starting April 1. On March 21, the State Administration of Foreign Exchange issued the Notice on Swapping to FEC for Consignment Goods, stipulating that all units permitted to sell imported consignment goods must switch to RMB pricing and collect FEC once issued, giving change in FEC and ceasing the direct collection of foreign currency.
The primary purpose of issuing FEC was to prevent foreign currency circulation from impacting the non-SEZ markets operating under the planned economy, but it did not restrict the circulation of foreign currency within the Shenzhen Export Special Zone [14] market. Although the Notice on Issuance of 'Foreign Exchange Certificates' issued by the Guangdong Provincial People’s Government on March 28, 1980, prohibited the Guangzhou Foreign Trade Center and Friendship Stores from directly collecting foreign currency and required a reduction in consignment points for foreign cigarettes and alcohol, it granted special policies to the Shenzhen Export Special Zone. It stipulated that "Shenzhen duty-free shops, luggage portage at the Shenzhen-Lo Wu bridge, portage at the Gongbei Port, and restaurants and kiosks on direct-through buses, ships, and planes" were allowed to directly collect foreign currency. On May 16, the CPC Central Committee and the State Council approved the Minutes of the Meeting of Guangdong and Fujian Provinces, deciding to formally rename the "Export Special Zones" such as Shenzhen and Zhuhai to "Special Economic Zones," stating that "Special Economic Zones are primarily for the absorption of overseas Chinese capital and foreign investment for construction." How was this capital to be "absorbed"? In practice, this regulation was often interpreted as allowing the circulation of foreign currency within the SEZs.
Allowing foreign currency circulation was both an inherent requirement of the Central Committee's pilot zones and a summary of Shenzhen’s practical experience. For instance, Shatoujiao in Shenzhen is separated from Hong Kong by only a single street, and the two sides have interacted year-round. During periods of economic hardship, many Shatoujiao residents fled to Hong Kong. In February 1979, the Guangdong Provincial Government allowed members of rural collectives in areas like Shatoujiao, near the Hong Kong border, to engage in "small-scale trade" of agricultural and sideline products using HKD as the medium of exchange. To recover HKD from the masses, foreign currency stores, once established, were also allowed to "provide supplies to local masses holding foreign currency." In 1979, the per capita HKD holdings of Shenzhen collective members was 5,000 HKD; by 1980, this had doubled to 10,000 HKD. In November 1980, Ren Zhongyi, First Secretary of the Guangdong Provincial Party Committee, inspected Shatoujiao and found that because the local area implemented "small-scale trade" allowing HKD transactions, the perennial problem of people fleeing abroad had been greatly alleviated, and household incomes had risen significantly. He therefore suggested that the "certain policies implemented in Shatoujiao" be implemented citywide. On May 18, 1981, Ren Zhongyi summarized the "special" nature of the SEZs at a meeting of the Standing Committee of the Guangdong Provincial Party Committee: first, customs exemptions (most import-export goods are tax-free, save for a few categories); second, relatively free import and export (the relatively free movement of merchants and the materials and capital required for their enterprises). On May 24, the Guangdong Provincial Party Committee and Government submitted the Report on the Status of Piloting Special Economic Zones in Our Province to the CPC Central Committee and State Council, proposing to expand the "Shatoujiao method" to the entire Shenzhen SEZ—that is, "allowing the SEZ to directly use foreign currency within designated scopes and at approved shops and units." From May 27 to June 14, the State Council held a working conference in Beijing on Guangdong, Fujian, and the SEZs, agreeing to limit foreign currency use to designated areas. The exact size of the "designated areas" and the number of "approved shops and units" were not specified at the time, but from the context, the scope and scale were undoubtedly expanded significantly.
The reason the Central Committee allowed and encouraged the Shenzhen SEZ to break "conventions and restrictions" [15] was the initial vision for Shenzhen to implement a "two ends out" [16] strategy—integrating with external markets while remaining partitioned from non-SEZ regions. On March 24, 1981, the Shenzhen Municipal Party Committee and the Shenzhen Revolutionary Committee issued the Opinions on Resolutely Striking Against Smuggling Activities, proposing strict management of various border import-export systems. The May 27–June 14 working conference on Guangdong, Fujian, and the SEZs required "simplifying entry and exit procedures to facilitate personnel movement," stating that "all enterprise staff in the SEZ shall implement the contract system, and enterprises have the right to recruit, trial, and dismiss on their own," and "the People's Bank should step up research on whether to issue an SEZ currency in Shenzhen." Concurrently, the meeting formally proposed to "establish a boundary line between the SEZ and non-SEZ areas as quickly as possible, to be patrolled by the People’s Armed Police Force [17]"; once established, "except for cigarettes and alcohol, which are taxed at half the minimum rate, and a few items taxed according to regulations, all means of production and consumption approved for import for SEZ use shall be exempt from customs duties. Goods or items transported from the SEZ to the interior shall be handled according to general import regulations." Furthermore, "domestic export goods needed by the SEZ market can be ordered by the SEZ from relevant foreign trade companies and settled in foreign exchange." In this way, trade between the Shenzhen SEZ and the interior market was effectively treated as "foreign trade."
As economic relations between Shenzhen and Hong Kong developed, the scope of "direct use of HKD" in Shenzhen continued to expand. By the end of 1981, the total sales revenue of Shenzhen’s commercial system was 142.40 million yuan. Of this, RMB accounted for 104.61 million yuan (73.5%); FEC accounted for 29.09 million yuan (20.4%); and HKD accounted for 29.01 million yuan (equivalent to 8.70 million yuan at the official rate, or 6.1%). In terms of currency circulation, RMB accounted for 75.2%, FEC for 19.6%, and HKD for 5.2%. Both sets of statistics were calculated at the official exchange rate; the actual proportion of HKD circulation was likely much higher. Shenzhen reported: "Though HKD is restricted to a certain range, the actual range of circulation is expanding. It is estimated that 75,000 households in the city have an average of 600 HKD per household, meaning 45 million HKD could potentially enter market circulation... That year, the HKD circulation of over 8 million yuan accounted for about 10% of total currency circulation." Some even estimated that "the total amount of HKD in circulation citywide is now close to that of RMB." Additionally, FEC could be used to buy goods in high demand, making it second only to HKD in popularity. FEC issued and recovered in Guangdong accounted for about 60% of the national total annually, and the Shenzhen SEZ was the area within Guangdong with the highest FEC turnover.
The Shenzhen SEZ market gradually saw a "Romance of the Three Currencies" [18] involving HKD, FEC, and RMB, where the circulation of multiple currencies coexisted with a multi-track price system. This issue drew intense focus and widespread discussion in academia at the time. For instance, Yuan Shibang of Jinan University argued: "According to the Bank of China's official rate on May 11, 1981, 100 HKD could be exchanged for 31.17 yuan in FEC or RMB, but the black market price for 100 HKD was 45–50 RMB. If one used RMB to swap for FEC, a surcharge (agio) of 30–40% or more was usually required." The Institute of Economics at CASS established the Hong Kong and Macao Economic Research Center; Liu Runhua, a member of the center, once compiled the three different prices for some commodities in the Shenzhen SEZ market (see Table 1).
As seen in Table 1, the exchange ratios between the RMB price, FEC price, and HKD price varied across different commodities. For a "Diamond Brand" 16-inch timed electric fan, the price was 233 yuan in RMB, 140 yuan in FEC, and 76.5 yuan in HKD (converted at the official rate)—a ratio of roughly 3.05:1.83:1. For an automatic folding umbrella, the price was 9.8 yuan in RMB, 6.5 yuan in FEC, and 2.7 yuan in HKD (at official rate)—a ratio of 3.63:2.41:1. For a large tube of "Maxam" toothpaste, the ratio was 2.67:1.6:1. This indicates that, influenced by supply and demand, the price ratios among the three currencies differed for almost every commodity. If calculated by actual exchange prices, the relative value of the RMB would be even lower. In short, regardless of the comparison, the purchasing power of the RMB was relatively the lowest in the market-adjusted Shenzhen SEZ.
Table 1: Price Differences of Commodities in Different Currencies in the 1981 Shenzhen SEZ Market [Omitted in source text provided, but referred to in analysis]
Because HKD was "more valuable" than RMB in the SEZ, overseas Chinese remittances would "shrink" if converted into RMB. Many relatives of overseas Chinese rejected these remittances. In 1979, Shenzhen’s remittance income reached 36.25 million USD, but by 1981, it was only 3.52 million USD, a 90.3% decrease from 1979. "In 1981, there were over 100 cases of relatives of overseas Chinese returning remittances, totaling over 800,000 USD." Remittances were partly "replaced by goods" and partly brought in as "direct foreign currency cash." Furthermore, although the actual utilization of foreign investment in Shenzhen grew in 1980 and 1981 compared to 1979, because investment in kind was more cost-effective, "over 80% [of the utilized foreign investment] consisted of various equipment and materials; the proportion of actual [monetary] investment was very small." Foreign merchants "often bought ready-made equipment and raw materials abroad and brought them in." Consequently, since 1979, Shenzhen’s foreign exchange settlements fell for two consecutive years. In 1981, it was 171 million USD, equivalent to 70% of the 1979 level. In other words, due to the RMB's exchange rate, the SEZ’s function of absorbing overseas Chinese and foreign capital was not fully realized in those two years.
More crucially, the Shenzhen SEZ failed to achieve a separation from non-SEZ areas, as reflected in the following aspects:
First, the economic foundation of the Shenzhen SEZ at its inception was weak, requiring support from the interior in terms of capital and technology. In 1980, the zone's GDP was only 196 million yuan, total industrial output was 71 million yuan, local fiscal budgetary revenue was 17 million yuan, and total import-export volume was 17 million USD. The Shenzhen municipal government believed that to accelerate the introduction of foreign capital and the development of modern industry, it was necessary to allow a group of strong domestic and foreign enterprises into the SEZ. This would facilitate the radiation of advanced foreign technology and management expertise to the rest of the country, accelerate the iteration of domestic industry, and enhance international competitiveness. In 1981, the Shenzhen Municipal Party Committee officially implemented the policy of "Combining External Introduction with Internal Linkage" (外引内联). That year, there were 43 "internal linkage" projects in the industrial, transport, infrastructure, and trade sectors, with a total agreed investment of 89.93 million yuan. In the city's total infrastructure funding, municipal unified investment accounted for only 31%, while the remainder was resolved through state investment, investment from central ministries and provinces, internal linkage enterprises, and foreign capital.
Next, due to the growth of the migrant population and the gradual unfolding of infrastructure construction, market demand in Shenzhen surged, creating a sharp contradiction between supply and demand. In 1981, the overall consumer price index for Shenzhen residents increased by 16.2% compared to 1979, and the general retail price index for commodities rose by 17.9%. Shenzhen consequently decided that, starting from 1980, any shortfall in the supply of agricultural and sideline products—beyond what was transferred in at par prices [19]—would be purchased from other regions at negotiated prices [20]. In that same year, the proportion of grain purchased at negotiated prices was 14%; edible oil, 40%; pork, 20%; live chickens, 20%; and fresh eggs, 82%. In 1981, the proportion of negotiated-price procurement continued to rise, with grain reaching 29%, edible oil 77%, pork 73%, live chickens 86%, and fresh eggs 89%. When Shenzhen was first established as a city, it implemented the price management methods for Category I and II agricultural and sideline products prescribed by Guangdong Province, with over 110 types of such products under municipal price control. In 1980, authority over 85 types of prices was devolved to lower levels, followed by another five types in 1981. Because a significant price gap existed between the market prices in the Shenzhen Special Economic Zone (SEZ) after liberalization and the planned prices in non-SEZ regions, the Shenzhen SEZ would go to non-SEZ areas to purchase industrial, mineral, agricultural, and sideline products at higher prices for export.
Furthermore, because high-end consumer goods such as color televisions were scarce in non-SEZ areas, the resale of these goods from the Shenzhen SEZ to the interior became a common phenomenon. To accommodate the material needs of the local populace, the Shenzhen municipal government once permitted commune members in border areas to ask relatives or friends to purchase items from Hong Kong, such as televisions, electric fans, watches, sewing machines, bicycles, cameras, radio-recorders, and electric rice cookers. In 1979, the retail price of a 14-inch color television in Hong Kong was 1,850 HKD, which converted to 592 RMB at the official exchange rate; meanwhile, the retail price in Hunan and Guizhou provinces was as high as 1,900 RMB, and in Jiangxi province it reached 1,980 RMB. Calculated at the official exchange rate, the retail price in Hong Kong was only about 31% of that in the interior. Since Foreign Exchange Certificates (FECs) were more effective for arbitrage [21] of the aforementioned goods, a large volume of FECs flooded into Shenzhen to snatch up commodities. From January to September 1982, Shenzhen issued only 123,400 yuan in FECs but withdrew 149.027 million yuan, resulting in a net withdrawal of approximately 148.904 million yuan. Judging by the volume of issuance versus withdrawal, the FEC had essentially lost its market competitiveness within the Shenzhen SEZ.
By the end of 1981, smuggling and "speculation and profiteering" [22] in coastal and border areas received widespread attention and criticism. Some criticized that "Guangdong has turned capitalist" and "Guangdong's red flag has hit the ground"; others criticized the SEZs as "enclaves of the international bourgeoisie," "the source of 'gray market goods' [23] on the Hong Kong market," "the main channel for international smuggling," and "the 'concessions' [24] of old Shanghai." Still others criticized that "running SEZs is a move by some to decouple from the planned economy and cut off a piece of territory to do their own thing." From February 11 to 13, 1982, the Secretariat of the CPC Central Committee convened a symposium in Beijing for Guangdong and Fujian provinces. The meeting circulated several documents on opposing smuggling and "The Origin of Concessions in Old China" compiled by the Research Office of the Secretariat, putting immense pressure on the Shenzhen SEZ. The meeting adjusted the authorities devolved to Guangdong Province and the Shenzhen SEZ, requiring both provinces to "persist with the planned economy as the mainstay and market regulation as a supplement" and to "incorporate all important economic activities into the national plan. Take more powerful measures to stop the dumping of imported daily consumer goods into the interior and stop the high-price procurement of agricultural and sideline products from across the country for export." It also stipulated that "except for units approved by the state following state-mandated principles and procedures, any unit or individual is strictly prohibited from engaging in foreign economic activities"; "gradually increase the proportion of state-unified and assigned procurement of agricultural and sideline products while reducing the proportion of negotiated procurement"; "stop the excessive issuance of bonuses"; and "prohibit other parts of the country from arbitrarily sending personnel to Guangdong to purchase imported materials," etc. Gu Mu recalled years later: "As the person in charge of SEZs and opening-up work, I felt no small amount of pressure. Especially in the first half of 1982, there was a distinct sense of 'chilly autumn winds' [25]."
The reasons behind this wave of criticism were highly complex, primarily manifesting as contradictions between the SEZs and non-SEZ regions. Consequently, the meeting repeatedly emphasized the need to adjust trade relations between the interior and the coast. On February 13, 1982, a certain leader criticized the foreign economic work of Guangdong Province (effectively pointing at the Shenzhen SEZ): "There may be a major flaw, which is the excessive and spontaneous use of price hikes to squeeze out agricultural and sideline products in short supply—including those from other provinces—for export; while simultaneously importing large quantities of daily consumer goods that are not, or not entirely, necessary for the provincial market. This is to say, there are deviations in both exports and imports."
Prior to this symposium for Guangdong and Fujian, in an effort to restrict the circulation of the Hong Kong Dollar (HKD) and other foreign currencies, Shang Ming, Vice Governor of the People's Bank of China (PBOC), led an investigation team to the Shenzhen SEZ to study the issuance of a special zone currency. However, due to the difficult straits the Shenzhen SEZ found itself in, the plan to issue a special zone currency had to be shelved. In April 1982, the PBOC headquarters reported to the State Council: "The issue of issuing currency is relatively significant and involves many aspects; it is not suitable to reach a hasty conclusion. Whether or not to issue a special zone currency is decided not by specific currency policies, but by the nature of the SEZ economy and the Central Committee's general policy toward the SEZs—including exactly how 'special' the zones should be—as well as our country's policy toward Hong Kong. These major issues, before a formal decision is made by the Central Committee, remain to be explored in practice."
III. The Second Deliberation on the Issuance of Special Zone Currency
As the PBOC report stated, whether to issue a special zone currency depended not only on the general policy toward SEZs but also on the policy toward Hong Kong. Since the Shenzhen SEZ primarily looked to Hong Kong as its model for economic learning, the Central Committee's policy toward the SEZs reflected, to a large extent, its attitude and policy toward Hong Kong. In other words, how the SEZs were managed would have a profound impact on the return of Hong Kong and Macau and the resolution of the Taiwan issue.
In the first half of 1982, the Central Committee began considering the issue of Hong Kong's return. On April 6, former British Prime Minister Edward Heath visited China. During their meeting, Deng Xiaoping articulated the policy toward Hong Kong for the first time: "China wants to maintain Hong Kong's status as a free port and international financial center, and will not affect foreign investment there. Under this premise, Hong Kong will be managed by Hong Kong people, including foreigners in Hong Kong... Our new Constitution has provisions allowing for the establishment of Special Administrative Regions, with a government formed by Hong Kong people themselves, whether Chinese, British, or others... Hong Kong's various systems will remain unchanged, and it may develop non-governmental relations, such as trade and commercial ties, under the name 'Hong Kong, China'." The return of Hong Kong would provide China with an economic entity with a higher degree of marketization and a larger market volume than the Shenzhen SEZ. Therefore, the problems previously arising in the Shenzhen SEZ could no longer be solved by "tightening" but only by "relaxing." Thus, the diplomatic negotiations regarding the return of Hong Kong became the catalyst for the second deliberation on issuing a special zone currency.
Britain initially proposed a solution to the Hong Kong issue based on "exchanging sovereignty for the right to govern"—acknowledging Chinese sovereignty while maintaining British administration—on the grounds that China lacked modern management experience and would find it difficult to maintain Hong Kong's "continued prosperity and stability." The Chinese side could not possibly agree to this proposal. Due to the serious divergence of opinions, the Hong Kong foreign exchange market faced immense selling pressure, and the exchange rate of the HKD against the USD fell repeatedly. In August 1982, the HKD dropped to over 6 to the dollar. On September 24, Deng Xiaoping met with British Prime Minister Margaret Thatcher and reiterated the policy toward Hong Kong: "Hong Kong's existing political and economic systems, and even most of its laws, can be retained, though some must be reformed. Hong Kong will continue to practice capitalism, and many existing suitable systems will be maintained." However, at a press conference in Hong Kong on September 27, Thatcher insisted that the unequal treaties signed between the Qing government and Britain were "valid." The HKD exchange rate continued to slide. In October, the HKD to USD rate dropped to 6.94, the lowest record since World War II.
To break the British government's doubts about the Chinese government's modern management capabilities, the Central Committee believed that continuing to advance the construction of the Shenzhen SEZ was not only an urgent need for socialist modernization but also helpful for gaining the initiative on the Hong Kong issue. This was because "if the SEZs are run well, it will have a great impact on compatriots in Hong Kong, Macau, Taiwan, and overseas, and will play a powerful role in the resolution of the Hong Kong issue and the reunification of the motherland"; "this is a major matter concerning the overall situation." On October 14, 1982, Gu Mu convened a meeting with relevant ministries of the State Council and leaders from the Guangdong Provincial Party Committee, including Ren Zhongyi, Liang Lingguang, Liu Tianfu, and Wang Quanguo. He pointed out: "The Central Committee's decision to implement special policies and flexible measures in Guangdong and Fujian and the policy of trial-running SEZs is unswerving... We must better implement the Central Committee's principles and policies on the basis of summarizing experience, manage the affairs of the two provinces well, and manage the SEZs well." On the 22nd, the Guangdong Provincial Party Committee and Provincial Government submitted to the CPC Central Committee and the State Council the "Preliminary Summary on the Trial Program of Special Economic Zones," which had been revised 13 times. It acknowledged problems in the SEZs regarding investment promotion, planning, infrastructure, management, and combating economic crimes. It also proposed that the planning for the Shenzhen SEZ should be "further studied, revised, and reported based on the nature, characteristics, and special tasks of the SEZs, and taking into account factors for the future recovery of sovereignty over Hong Kong." Furthermore, it re-proposed that "regarding the issue of issuing special zone currency in Shenzhen, it is suggested that relevant central departments study it as soon as possible and propose a plan." On the 30th, Chen Yun [26] gave instructions: "The SEZs must be run; we must constantly summarize experience and strive to run them well." Chen Yun's instructions indicated that a certain level of consensus had been reached at the central level that "the SEZs must be run and must be run well."
On December 3, 1982, the CPC Central Committee and the State Council approved and distributed the "Minutes of Several Issues in the Current Trial Work of Special Economic Zones." This document, formed on the basis of the "Preliminary Summary" submitted by Guangdong Province, explicitly stated that running the SEZs well was of great significance for the return of Hong Kong and the resolution of the Taiwan issue. The document criticized the SEZs for insufficient foreign investment promotion, noting that "some economic contracts signed with foreign, Hong Kong, and Macau businessmen have flaws and problems to varying degrees." It also noted that the domestic infrastructure front was spread too thin, and that "going to the interior to buy industrial, mineral, agricultural, and sideline products at high prices for export, and importing certain high-end consumer goods for low-price resale to the interior, has also led to problems such as smuggling, tax evasion, and tax fraud," as well as the chaotic state of currency circulation. However, the document simultaneously argued that the SEZs should be granted more autonomy based on the principle of "relaxing the first line and controlling the second line" (specifically, "external relaxation and internal tightening"): externally, the SEZs would have more autonomy and various tax incentives, with development funds primarily relying on the absorption of Hong Kong, Macau, overseas Chinese, and foreign capital, and the acceleration of SEZ legislation; internally, the overall development plans of the SEZs would be approved by the Central Committee, with necessary materials and commodities allocated centrally by the state. Materials were allowed to be sourced through four channels, including imports and self-production, but resale to the interior was strictly prohibited. In short, the Central Committee's principle for the Shenzhen SEZ was further relaxation toward the outside and further tightening toward the inside.
"Relaxing the first line" prompted further circulation of the HKD within the Shenzhen SEZ. The "Minutes of Several Issues in the Current Trial Work of Special Economic Zones" noted that in 1982, "it is estimated that residents in Shenzhen hold more than 100 million HKD, which circulates covertly alongside RMB and FECs." Some argued this estimate might be low, suggesting that in 1982 "Shenzhen residents held about 200 million HKD, averaging over 2,000 HKD per household, which was nearly the level of the per capita currency holding of Hong Kong residents in 1980 (2,050 HKD)," an increase of 155 million HKD over 1981 estimates. The circulation proportion of RMB in the Shenzhen SEZ, calculated at the official rate, fell from 75.2% in 1981 to 64.6%, and at actual circulation levels, it was only 54% (with the actual circulation of HKD reaching 23.8%). Because the RMB appeared on the verge of losing its dominant position in the Shenzhen SEZ, the issuance of a special zone currency appeared even more necessary and urgent.
As the exchange rate of the Hong Kong Dollar (HKD) continued to decline, and given that the HKD was viewed in a sense as a tool of British colonial rule, some proposed that after the handover of Hong Kong, a Special Economic Zone (SEZ) currency should be used to gradually replace it. In January 1983, Qian Junrui, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS), and Huan Xiang, Director-General of the International Studies Research Center of the State Council, led an investigation team composed of departments such as the Economic Research Center of the State Council to Shenzhen, Zhuhai, and Macau to survey attitudes toward the issuance of an SEZ currency. On the 11th, the team held a symposium with Shenzhen leadership cadres, including Liang Xiang and Zhou Ding. At the meeting, Huan Xiang argued that the issuance of an SEZ currency was "imperative." He stated: "This is a major matter concerning the future recovery of sovereignty over Hong Kong; the mission it shoulders is not merely a question of the SEZ's own needs, but must be considered from the perspective of the country’s long-term strategic mission. When we recover sovereignty over Hong Kong in the future, will we also use RMB? In my view, it is impossible; it is highly probable that the same currency used in the SEZ—that is, an SEZ currency—will be used." However, in terms of economic strength, the gap between the Shenzhen SEZ and Hong Kong was vast, and the difficulty of replacing the HKD with an SEZ currency was easily imaginable.
Whether the SEZ currency should replace the HKD after Hong Kong's return remained perhaps inconclusive, but the handover was certain to strengthen the ties between the Shenzhen SEZ and international markets. A massive influx of foreign merchants and capital was inevitable, and the first issue to be resolved was currency exchange. This undoubtedly accelerated the inclusion of an SEZ currency on the agenda. On April 4, 1983, Tian Jiyun, Deputy Secretary-General of the State Council, convened a meeting to announce the establishment of the "State Council SEZ Currency Research Group," with Liu Hongru, Vice Governor of the People’s Bank of China, as the leader. He instructed that "the group's task is not to study whether or not to issue an SEZ currency, but to study how best to issue it." From April 6 to 18, during an inspection of Shenzhen, Gu Mu pointed out: "It is now becoming increasingly obvious that it will not work without issuing an SEZ currency. Once foreign merchants enter the SEZ, they will inevitably bring various currencies. How should this be handled? If they must convert to RMB, the exchange rate is set by us and does not align with the actual value of foreign currencies, so foreign merchants will feel they are losing out. If this is not resolved, foreign merchants will not come to invest. Of course, small investments like simple materials processing [27] will still exist, but large investments—those genuinely intended for industry—will not be able to enter." On the 25th, Gu Mu attended a meeting of the Standing Committee of the CPC Guangdong Provincial Committee and explicitly stated that work on the SEZs "should be considered in connection with the historical problem of recovering sovereignty over Hong Kong and Macau in 1997." He added: "Our thinking on establishing SEZs was originally not very clear; now we should explicitly raise this issue."
At that time, the central authorities' new vision for the Shenzhen SEZ was for it to rely on Hong Kong as a mutual support, so that "the two could join forces to break into the international market." Deng Xiaoping believed: "In the development of the SEZ, there is a question of integrated planning with Hong Kong. We should not have the SEZ build things that Hong Kong already has in abundance; such duplication will become a burden." Hong Kong was small in territory and scarce in resources. With rapid economic development, high land rents and labor costs had severely restricted its further growth. The establishment of the Shenzhen SEZ provided Hong Kong's economy with vast room for expansion, and many Hong Kong businessmen were intensely interested in investing in factories in the Shenzhen SEZ, where land and labor were cheap. After the return of Hong Kong, the relationship between Hong Kong and the Shenzhen SEZ would become even closer. How to strengthen economic coordination, integrate the two markets and two economies, and join forces to enter the international market became an important issue for the central government's overall planning. These considerations undoubtedly inclined more people toward issuing an SEZ currency.
Meanwhile, the continuous decline of the HKD exchange rate and its unstable status objectively accelerated the progress of the SEZ currency plan. In September 1983, a "September Storm" erupted in the Hong Kong foreign exchange market. On the 17th, the HKD plummeted; on the 24th, the day after the fourth round of Sino-British negotiations ended, the exchange rate fell to its lowest point of 9.7 [HKD to 1 USD]. Many Hong Kong citizens rushed to banks to buy US dollars, and panic buying of rice, peanut oil, and other supplies occurred in some supermarkets. The massive devaluation of the HKD caused many to lose confidence in retaining it. At the end of that same month, a member of the Standing Committee of the National Committee of the CPPCC, who actively advocated for the SEZ currency, wrote to Hu Yaobang, Chen Yuan, and Bo Yibo suggesting its issuance. On October 15, Hu Yaobang instructed: "Please Comrade Chen Yun consider and decide." On the 23rd, Chen Yun wrote a comment expressing his disagreement with issuing an SEZ currency.
While "opening the first line" [28] was indeed the driving force for the SEZ currency, "controlling the second line" [29] was the key to whether it could be issued. Judging from Chen Yun's statements around this period, he worried that if the "second line" could not be controlled, the SEZ economy would impact the non-SEZ economy. On October 20, 1983, the Ministry of Foreign Trade reported to Chen Yun, mentioning that various regions were focusing only on foreign exchange earnings and were cutting prices to compete externally, regardless of RMB profits or losses. Chen Yun suggested "going back to the old path"—returning foreign trade pricing power to the central authorities. On November 22, Chen Yun wrote again to the Premier of the State Council, stating: "The issuance of banknotes in three-digit [billion] figures absolutely cannot continue. The income of local governments, enterprises, and peasants cannot increase any further. The problem of price hikes will ultimately fall on the government's shoulders." In view of the chaotic pricing appearing in the SEZs, Chen Yun's priority at this time seemed to be strengthening central management over currency issuance rather than delegating power to the local level.
Thus, a complex situation emerged: on one hand, due to fears that the "second line" could not be controlled, a considerable number of high-ranking cadres hoped to postpone the issuance of an SEZ currency; on the other hand, due to the opening of the "first line," failing to issue an SEZ currency would make it difficult to limit the circulation of the HKD. In 1983, the proportion of RMB circulation in Shenzhen further declined. Calculated by official exchange rates, RMB accounted for only 53.1% of total currency circulation, while the HKD accounted for 30.7%. Since Shenzhen residents held large amounts of HKD, some estimated that the actual share of RMB was only 32%, while the HKD reached 51.8%. On November 30, Vice Premier Tian Jiyun stated during an inspection of the Shenzhen SEZ: "There is a theory I haven't quite wrapped my head around, which says that issuing an SEZ currency will turn Shenzhen into a 'second Hong Kong'; but what I worry about is that if we don't issue an SEZ currency, will the SEZ become a market for foreign currency circulation? If it does, hasn't the SEZ truly become a 'second Hong Kong'?" This indicated that the question of "to what extent the SEZ should be 'special'" remained unresolved at this time. In other words, the question of whether the Shenzhen SEZ should be allowed to run a "second Hong Kong" as an economic experiment had no answer while Hong Kong's future was still uncertain.
IV. The Third Deliberation on the Issuance of an SEZ Currency
On January 10, 1984, the Hong Kong branch of the Xinhua News Agency published "Future and Hope" regarding the return of Hong Kong. On the 22nd, the British Sunday Times published "Britain Accepts China's 'Guarantees' on Colony's Capitalist Future – Mrs. Thatcher Hands Hong Kong Over to China," disclosing that Britain had "accepted in principle that China will have both sovereignty and administration over Hong Kong after 1997." On January 25 and 26, the eighth round of Sino-British negotiations was held; the British side expressed understanding of China's position on sovereignty, and their strategy began to shift toward "ensuring that after 1997, under Chinese sovereignty, Hong Kong would obtain a high degree of autonomy, while maintaining arrangements that kept the Hong Kong lifestyle and the essence of the existing system unchanged." This meant that the "One Country, Two Systems" policy was confirmed for implementation in Hong Kong. This prompted the central authorities to break out of the "framework" [30] and formally consider whether the Shenzhen SEZ could be built into another "free port" economically; consequently, the issuance of an SEZ currency was put back on the agenda.
From January 24 to 26, 1984, Deng Xiaoping inspected Shenzhen. While listening to the report from the CPC Shenzhen Municipal Committee, Deng asked: "How many types of currency are currently circulating in Shenzhen?" Municipal Party Secretary Liang Xiang answered: "Three: RMB, Foreign Exchange Certificates (FEC) [31], and HKD. We now want to issue an SEZ currency, but there is controversy and experts have not reached a consensus. If this issue is not resolved quickly, it will have a major impact on the development of the Special Zone." Deng Xiaoping worried that issuing an SEZ currency would impact RMB circulation and the economic system in non-SEZ areas, and thus instructed: "To issue a new currency, the key issue is to consider the impact on the RMB! You must study this." On February 8, Deng Xiaoping inspected Xiamen, accompanied by Xiang Nan, First Secretary of the Fujian Provincial Committee. Regarding the specifics of this report, Xiang Nan later recalled: "We considered that building Xiamen into a free port could fully mobilize the enthusiasm of overseas Chinese and foreign investors; it would also be beneficial for solving the Taiwan and Hong Kong issues. Comrade Xiaoping asked me, 'Is Hong Kong a free port? What major policies must a free port implement?' After discussing it with several Fujian officials present, I replied that there are three main policies: free movement of people, free entry and exit of goods, and free convertibility of currency. After hearing this, Comrade Xiaoping said that the first two are acceptable. For the last one, what will you use to exchange with others? I said we were considering issuing an SEZ currency. Comrade Xiaoping thought for a moment and said, 'Will you alone issue an SEZ currency, or will several SEZs jointly issue one? This issue needs to be studied.'"
On the morning of February 24, 1984, after returning to Beijing, Deng Xiaoping spoke with Hu Yaobang and others, stating that "By establishing SEZs, we not only gain benefits in economic terms and in training personnel, but there is also a question of outward influence. Success in the SEZs, even without mentioning its impact on Taiwan, is at least beneficial for solving the Hong Kong issue and for reassuring the people of Hong Kong." He added: "In establishing SEZs and implementing the opening-up policy, we must be clear about a guiding ideology, which is not to tighten, but to let go." He also requested that the entirety of Xiamen be designated an SEZ, that certain free port policies be implemented, and that more coastal port cities be opened. Other materials show that during this conversation, Deng Xiaoping specifically noted: "The SEZs must have an SEZ currency, because the RMB cannot float. With an SEZ currency, foreign currency can be freely converted, which is the only way to mobilize the enthusiasm of foreign and overseas Chinese investors." He continued: "To issue an SEZ currency, first it must be guaranteed by the Bank of China, and second it must be supervised by the Bank of China. With these two conditions, there is no danger." "What I worry about is the impact on the RMB—how large it will be. Whether Shenzhen and Zhuhai use one currency, and Xiamen and Shantou use another, or if all SEZs issue one currency, can be studied." The Premier of the State Council interjected: "My thought is: for Shenzhen to become dynamic, it cannot function without its own currency. Currently, Shenzhen doesn't issue currency, and in practice, calculations are done in HKD." On the 27th, Wang Zhen reported to Hu Yaobang, the CPC Central Committee Political Bureau, and the Secretariat regarding his accompaniment of Deng Xiaoping on the inspection, stating that Deng requested a focused study on issuing an SEZ currency in Shenzhen and Xiamen. It appears that Deng Xiaoping considered both the pros and cons of issuing an SEZ currency: on one hand, he worried about the impact on the RMB and advocated for trials only in Shenzhen and Xiamen; on the other hand, with the smooth resolution of the Hong Kong issue, he advocated for building free ports, increasing the number of open cities, and expanding the introduction of foreign capital to accelerate socialist modernization. Weighing the pros and cons, issuing an SEZ currency seemed more advantageous.
Thereafter, preparations for issuing an SEZ currency proceeded intensely. In mid-March 1984, Liu Hongru led the State Council SEZ Currency Research Group to conduct field research in the four SEZs and proposed a currency scheme involving exchange rates, foreign exchange backing, monetary relations, finance, and wages. From March 26 to April 6, the Secretariat of the CPC Central Committee and the State Council held a symposium for some coastal cities, deciding to "run the Special Economic Zones faster and better," and explicitly pointing out: "Issuing an SEZ currency and allowing foreign capital to freely enter and exit the SEZs are important measures to attract more foreign and overseas Chinese investors and to introduce advanced technology. The SEZ currency research group, composed of the People's Bank of China and other units, is drafting the issuance plan and considering specific schemes to allow our banks stationed in Hong Kong and Macau, overseas Chinese banks, and foreign banks to open for business in the SEZs. After this plan is submitted to the Central Committee and the State Council for approval, it will first be implemented in Shenzhen." On April 7, Gu Mu said at a working conference of the four SEZs: "To use our power well now, we are only short of a currency. If that is solved, we will have a free port." In June, the People’s Bank established the Shenzhen Guanghua Note Printing and Minting Company and printed a batch of SEZ currency samples. The exchange rate for the SEZ currency was planned to be determined by a weighted average of four currencies: the US Dollar, Japanese Yen, Hong Kong Dollar, and British Pound. Banknote denominations were 5, 10, 50, 100, and 500 yuan, while coins were in denominations of 1, 2, and 5 fen, and 1 jiao, 5 jiao, and 1 yuan. On August 10, the State Council held the Beidaihe Meeting and tentatively agreed to authorize Shenzhen to issue an SEZ currency.
In the autumn of 1984, the Central Committee gradually shifted the focus of reform from the countryside to the cities. On October 20, the Third Plenary Session of the 12th CPC Central Committee was convened. The "Decision of the Central Committee of the Communist Party of China on Reform of the Economic Structure" adopted at the meeting pointed out that the fundamental task of reform is to "establish a vibrant and vigorous socialist economic structure with Chinese characteristics" and that "to reform the planning system, we must first break through the traditional concept of pitting the planned economy against the commodity economy [32]. We must clearly recognize that the socialist planned economy must consciously base itself upon and utilize the law of value [33]; it is a planned commodity economy based on public ownership. The full development of the commodity economy is an insurmountable stage of socio-economic development and a necessary condition for realizing our country's economic modernization." This marked the comprehensive launch of economic structural reform with the cities as the focal point. The further development of reform and opening up brought new challenges to the currency reform then under deliberation. Namely, in the process of the entire nation shifting from a planned economy to a commodity economy, was it appropriate or necessary to issue a local currency—a Special Zone Currency—that was adapted to a market economy?
In the fourth quarter of 1984, total investment in fixed assets nationwide grew by 33.9%, bank cash expenditures for wages grew by 22.3%, various bank loans grew by 28.8%, and the volume of currency in circulation grew by 49.5%. To quickly withdraw currency from circulation, the Central Financial and Economic Leading Group agreed on November 2 to the "Report of the State Planning Commission and the State Economic Commission on Opinions Regarding Utilizing National Foreign Exchange Reserves to Promote Economic Development," deciding to significantly increase the use of foreign exchange to import goods in high market demand. National foreign exchange reserves plummeted from US$13.8 billion in August of that year to US$8.22 billion by year-end. The positioning of the Shenzhen Special Economic Zone (SEZ) was to utilize foreign capital and introduce advanced technology, management, and equipment to produce products capable of opening international markets and increasing foreign exchange earnings. However, at this time, a significant gap existed between the economic strength of the Shenzhen SEZ and that of developed countries and regions. A considerable number of SEZ products lacked competitiveness on the international market and could only be diverted to domestic sales. Not only did this fail to achieve the goal of opening international markets and increasing foreign exchange earnings, but it also squeezed the inland economy, which had a weak productive base. Originally, a relatively strict boundary existed between the Shenzhen SEZ and non-SEZ areas (though its effectiveness was mediocre) [34]. However, with the comprehensive advancement of reform and opening up, the restrictive function of this boundary was destined to weaken further, and the contradictions between the SEZs and non-SEZ areas would inevitably become more apparent.
On November 12, 1984, the Secretariat of the CPC Central Committee held a meeting and agreed in principle to the issuance of a Special Zone Currency. It held that "this matter has been discussed for several years; because it is a trial within a limited scope, no major problems will arise. This experiment is very important; domestic economic and financial reforms can draw experience from it, and we can observe global financial changes through Shenzhen." However, it also noted many dissenting voices, requesting that documents regarding the adjustment of economic and financial policies be sent to the State Council for handling, and that legal documents such as the regulations on the management of foreign banks and the regulations on the Special Zone Currency be sent to the Standing Committee of the National People's Congress (NPC) for discussion. On November 21, the Premier of the State Council stated during an inspection of Guangdong: "Is the economy of the Special Zone 'export-oriented' or 'inward-looking'? This question also requires careful study. We must not engage in large amounts of processing and assembly using imported raw materials only for the products to be sold domestically in large quantities." In December, Gu Mu convened a work meeting for Guangdong and Fujian provinces, where discussions once again emerged regarding the Special Zone "earning money from the interior," the overextension of the capital construction front, and involvement in the Hainan automobile smuggling case [35]. In 1985, several Hong Kong scholars published a series of articles such as "Where Is Shenzhen's Problem?", criticizing the Shenzhen SEZ for failing to achieve the widely publicized goals of being "centered on industry, centered on foreign capital, and centered on exports." They argued that "Shenzhen's prosperity basically relies on the Special Zone’s special economic policies, using imported commodities and materials to earn money from the domestic market, which runs counter to the original conceptualization and requirements. If Shenzhen's practice truly has important reference value for coastal open cities, this reference is primarily a lesson, not an experience of success." Criticisms of the Shenzhen SEZ from overseas news media in Japan, the United States, and elsewhere also gradually increased.
The question of whether "opening the first line and controlling the second line" [34] could truly be realized was precisely the key to whether or not to issue a Special Zone Currency. On April 27, 1985, Vice Premier Yao Yilin stated during an inspection of the Shenzhen SEZ: "Active preparations must be made for the issuance of a Special Zone Currency; the timing of the issuance must be discussed. I agree with Comrade Liang Xiang [36] that the issuance of the Special Zone Currency must be conducive to the Special Zone’s transition toward an export-oriented economy and must be adapted to this transition." In June, the 11th Session of the Standing Committee of the 6th NPC rejected the proposal to issue a Special Zone Currency on the grounds that "it is inappropriate for one country to have two currencies." In August, the Premier of the State Council explicitly pointed out in a talk regarding Shenzhen that the Special Zone Currency should be "re-evaluated after three years." On the 15th, Gu Mu wrote an instruction on the sample of the Special Zone Currency submitted by the People's Bank of China: "Approved, but suspend printing." Liu Hongru [37] once informed the CPC Shenzhen Municipal Committee: "The Special Zone Currency was worked on for four or five years; sample notes were ready, and design drawings were complete. In the end, it was not issued primarily due to conditional issues—mainly concerns about the relationship with the interior, that it would be unfavorable for interactions with the interior, and unfavorable for relying on the interior to propel Shenzhen’s economy." Gu Mu also recalled: "From the perspective of the Special Zone’s development, issuing a freely convertible legal tender circulating within the Special Zone would have a certain effect. However, it would require the state to provide a massive foreign exchange reserve as an issuance fund. Furthermore, there were questions of how to manage it after issuance, whether to issue it only in Shenzhen or in all four Special Zones, and if issued in all four, whether it would trigger a chain reaction in other open areas or even nationwide. The scope involved was very broad, and the problems were quite complex." Against the backdrop of the comprehensive unfolding of reform and opening up, the focus of currency reform gradually shifted from localized currency reform to comprehensive currency reform.
V. Conclusion
After the launch of reform and opening up, China's economy achieved a historic transition from a highly centralized planned economic system to a socialist market economic system, and from being closed or semi-closed to all-round opening up. During this transition, most previous studies have noted the role of opening to the outside world in the economic reform of coastal areas but have paid little attention to the influence of central–local relations and inter-regional relations. In fact, the reform and opening up of coastal areas can only receive a relatively rational explanation when placed within the perspective of central–local and inter-regional relations.
Different regions implement different economic systems, and different economic systems require different currencies. After the establishment of the SEZs, China's economic geography could be roughly divided into three categories: first, the non-SEZ areas still implementing a planned economy; second, the "Special Zones" (encompassing both the Export Special Zone and Special Economic Zone periods) conducting market economy experiments; and third, the highly marketized regions of Hong Kong, Macau, and Taiwan. The central axis for the interaction between these three types of regions with different economic systems was the SEZ. The reform and opening up of the Shenzhen SEZ had to both balance the relationship between the SEZ and non-SEZ areas and coordinate the relationship between the SEZ and Hong Kong. It should be noted that the Shenzhen SEZ differed from the Hong Kong of that time; politically it submitted to the leadership of the Central Committee, while economically it learned from Hong Kong's economic experience. The interaction between Shenzhen and Hong Kong actually depended on Central Committee policy. How to properly handle central–local relations was both the key to driving reform and opening up, and the key to whether the Central Committee would agree to issue a Special Zone Currency. As reform and opening up continued to advance, the scope of reform expanded from point to surface, gradually broadening. Localized currency reform was thus ultimately transformed into comprehensive currency reform, and the Special Zone Currency plan was consequently abandoned.
China's reform and opening up possesses a complex multifaceted nature; reform distinguishes between internal and external, and opening up likewise distinguishes between internal and external. Opening to the outside world promoted the integration of the Chinese market with the international market, while opening to the interior gradually integrated the domestic market, moving the reform of the economic system from the local to the global level. If we simplify reform and opening up into a single linear reform achieved overnight, or view it as overly easy and simple, we will invisibly weaken its historical and practical significance. The case of the Shenzhen Special Zone Currency in the early period of reform and opening up perfectly presents the complexity and diversity of this historical process.
(Author: Xiao Anmiao, Assistant Professor, School of Marxism, Hunan University) Web Editor: Tong Xin Source: CPC History Studies (中共党史研究), Issue 5, 2024.