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China will give the green light to international development bodies to issue renminbi-denominated bonds as the country eases restrictions on capital outflow and moves steadily towards making its currency fully convertible.
A senior official with the State Administration of Foreign Exchange (SAFE) said it and other government departments are working on details of bond issuance by the International Finance Corp (IFC), the Asian Development Bank (ADB), and the Japan Bank for International Co-operation (JBIC).
IFC is the World Bank Group's private-sector wing.
Sources said the issue will target institutional investors. The China First Business News newspaper reported that the total size of the issue by the three will be worth 4 billion yuan (US$480 million).
A source close to IFC's issuance plan said it had applied to issue 1 billion yuan (US$120 million) worth of 10-year-bonds, but this remains subject to official approval and market conditions.
Permitting them to issue bonds "will be conducive to the development of China's much underdeveloped bond market," Zou Lin, director-general of SAFE's capital account management department, told China Daily.
An IFC spokesman in Hong Kong added that its main intention for the flotation is to facilitate the growth of China's capital market.
Zou said that if the issuance by the three proceeds smoothly, the country's financial authorities may consider the possibility of allowing other high-rating international issuers to follow suit.
China used to limit capital outflow and encourage inflow.
"Now we will try to facilitate the orderly movement of capital in two ways and manage the inflow and outflow in a more balanced manner," Zou said.
In addition to the bond issuance, SAFE will also support the overseas investment plans of social security funds, he said.
SAFE took a range of measures last year to relax controls on the outflow of foreign exchange.
These steps included permitting Chinese enterprises involved in international business to retain more foreign currency holdings, relaxing the requirements on Chinese companies' investing activities overseas and allowing Chinese citizens emigrating overseas to transfer assets to their new place of residence.
China has fully liberalized eight of the 43 categories of transactions under the capital account specified by the International Monetary Fund.
Only six categories cannot be changed.
The others, which account for some 70 per cent, can be changed to varying extents.
On the inflow side, SAFE officials said they will continue to encourage the legal inflow of money.
In the meantime, SAFE will also seek to plug loopholes in its administration of fund inflow to fend off speculative "hot money," they said.
China's dynamic economy, and more recently, expectations over an appreciation of the renminbi, have attracted increasing amount of funds into China.
Some of the these funds entered the country illegally, something which highlights the need for strengthened supervision and management.
A SAFE spokesperson said late last year that it spotted companies' illegal activities in both investing and international trade which SAFE officials believe are characteristic of speculative arbitrage.
SAFE officials said it will improve its monitoring capabilities and will crack down on the illegal activities.
However, that will not mean increased controls on the flow of funds.
"The major change is to create a more open foreign exchange system," Zou said.
(China Daily January 5, 2005)
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