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China has lifted the ban on residents and organizations investing their foreign exchange savings in overseas stock markets, in a latest move to ease the pressure produced by its swelling foreign exchange reserves.

 

The only restriction is that they have to invest through approved fund management companies, the State Administration of Foreign Exchange (SAFE) said in a notice Wednesday.

 

Fund management companies shall have to obtain licenses for forex transactions and invest within the approved quotas, the notice said.

 

Investors can only use their forex deposits in banks. Cash is not allowed. All the transactions must be done through banks to facilitate monitoring by authorities, the notice said.

 

China overtook Japan as the country with the biggest forex reserve in February. By the end of June, its forex reserve stood at US$941.1 billion.

 

At the current rate, it is believed China's forex reserve will break the US$1,000 billion mark by the end of the year.

 

The huge forex reserve has exerted huge pressure on the Chinese renminbi to appreciate, with the US threatening to impose punitive tariffs on Chinese exports if no further appreciation occurs.

 

The ever increasing reserve also brings risks for its managers, such as the risk of a major dollar depreciation or collapse, as the majority of China's forex reserve has been used to buy US treasury bonds.

 

As part of its efforts to ease the pressure, Chinese authorities have found new uses for the reserve, injecting billions of dollars into its state-owned commercial banks to improve their capital adequacy before their listings on the stock exchanges.

 

The government has also eased controls on the possession of forex by individuals and entities.

 

Recently, the central bank issued rules allowing residents to buy foreign-currency denominated investment products using renminbi.

 

The new policy that "further expanded the investment channels for foreign currencies in the possession of domestic entities and individuals...This marks an important step in China's opening of its financial sector and in its efforts to press forward with the convertibility of renminbi under capital projects," the SAFE notice said.

 

(Xinhua News Agency September 7, 2006)