China will allow qualified financial institutions such as
commercial banks, insurers and fund companies to invest overseas,
the People's Bank of China (PBOC) said in a statement on
Friday.
Companies and individuals will also be allowed to hold more
foreign exchanges, a sign of accelerating reform of the foreign
exchange regime.
Experts believe the move signals formal approval from the
central government for the Qualified Domestic Institutional
Investors (QDII) scheme.
According to the central bank, commercial banks can now pool
domestic yuan deposits from both individuals and institutions and
convert them into foreign exchange to invest in fixed-income
investment products abroad.
Fund companies will be able to use foreign currency holdings
held by individuals or institutions to invest in overseas
securities markets.
Insurers will also be given the green light to invest a certain
proportion of their assets in fixed-income and other products
abroad, the central bank said.
Previous controls on foreign exchange accounts will be relaxed
and approval procedures for foreign exchange payments in the
service trade will be simplified, it said.
Corporations and individuals will be able to buy foreign
currencies more easily.
Individuals, for example, will be allowed to buy up to US$20,000
in foreign exchange a year, up from the previous quota of
US$8,000.
The major policy adjustment comes as the country's forex reserve
has hit a record high.
Fuelled by continuous trade surpluses and direct foreign
investment, China's official forex reserves reportedly rose to
US$853.6 billion at the end of February, overtaking Japan as the
world's biggest holder for the first time.
"The eased control on foreign exchanges will help slow down the
rapid increase in the country's forex reserves," said Zhang
Xuechun, an economist with the Asia Development Bank (ADB).
She noted that the previous tight control on foreign exchange
outflow and lax restriction on inflow led to fast accumulation of
China's forex reserves.
Zhang said the policy adjustment will help Chinese companies in
need of foreign exchanges improve their management and avoid risks
in the foreign exchange market.
"It's a significant step in establishing a more market-driven
foreign exchange mechanism," she said.
"The easing of controls on foreign exchange also shows China's
increasing confidence in its foreign exchange management
capability," she added.
The central bank has taken a number of measures to loosen
capital controls recently.
One new policy favors a shift from stockpiling foreign exchange
reserves in State coffers to letting businesses and residents hold
more foreign currency, Wu Xiaoling, deputy central bank governor,
said earlier this month.
"The People's Bank of China will closely monitor the
international balance of payment and adjust policies accordingly to
avoid risks and safeguard economic and financial security," the
central bank said.
(China Daily April 15, 2006)