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What is currency convertibility?

What is currency convertibility?

Currencies may work fine in a particular country or region, but it may happen that certain currencies are not convertible into other currencies or gold.

Sometimes this is by choice, such as was formerly the case with closed economies like the People’s Republic of China, Soviet Russia, Cuba, and others. Most currencies are convertible into other currencies. Banks, at least the central banks of countries, tend to have reserves of most foreign currencies with their citizens do business.

This partially serves the purpose of giving the central bank the ability to cushion the impact of any sudden changes in the supply and demand of that currency if it might affect the domestic economy in any way. Some foreign currencies are considered too risky for a bank to hold many reserves of, and this currency may find itself classified as non-convertible in the other countries of the world.

In formerly closed economies such as China, Russia, Cuba, and others, the currencies were non-convertible at the prerogative of their governments. Foreign Exchange Certificates (FECs) would be issued to foreigners in instances where conversion was necessary, but the government, for various reasons, used this method to regulate the flow of money across national borders.

Keywords: China, foreign exchange reserves, currency conversion charges, closed economies, non-convertible currencies, Cuba, Russia,