China yesterday scrapped rules requiring companies to convert
part of their current-account foreign exchange holdings into the
yuan.
Companies used to be allowed to retain foreign exchange
equivalent to 80 percent of their revenues in the previous year
plus 50 percent of their expenditure; and the rest had to be sold
to the State under the mandatory foreign exchange settlement
regime.
The new rules, effective immediately, will help companies use
and manage their foreign exchange better, and contribute to a more
balanced international payments situation, according to a statement
on the website of the State Administration of Foreign Exchange
(SAFE).
The move will ease pressure on the country's foreign exchange
reserves, which continue to pile up, said Zhuang Jian, senior
economist at the Asian Development Bank (ADB) in China.
Reserves rose to US$1.32 trillion at the end of June, compared
with US$1.06 trillion at the end of 2006. The six-month increment
was higher than the whole-year increase of US$247 billion last
year.
The country's current account, mostly trade surplus, has been a
major source of the surge.
To ease the pressure from rising reserves, the government now
allows companies and individuals hold foreign currencies and invest
abroad.
The latest move will work to reduce China's foreign exchange
reserves but only in the medium- to long-term, Yan Qifa, an analyst
with the Export-Import Bank of China, told China Daily.
In the near term, as the Chinese currency continues to rise,
companies will opt to hold the yuan, not the US dollar, therefore
choosing to convert their foreign exchange with the monetary
authorities.
The new rules may make it easier for some companies to invest
overseas, analysts said, but ADB's Zhuang said the country should
strengthen capital outflows.
The short-term, abrupt outflow of large amounts of capital may
affect a country's financial stability, as shown in the 1997-98
Asian financial crisis, he said.
China has gradually eased restrictions on companies retaining
foreign exchange.
From 2002, companies were allowed to retain 20 percent of their
foreign exchange revenues.
The proportion was raised to 50 percent in 2004 and to 80
percent in 2005.
(China Daily August 14, 2007)
