China will scrap quota restrictions on how much foreign exchange domestic companies can buy to finance their overseas investments, the latest move in a string of measures to relax the country's forex controls.

Under the new rules, which will take effect on July 1, domestic companies will be allowed to use their own foreign exchange holdings, buy foreign currency from regulators or borrow from both overseas or domestic lenders to invest abroad, the State Administration of Foreign Exchange (SAFE) said in a statement posted on its website yesterday.

Overseas investments refer to companies setting up subsidiaries, mergers and acquisitions, the foreign exchange regulator said.

"The policy revisions will help companies' 'go abroad' strategies and meet their increasing demand for conducting overseas investments," it said in the statement.

"The move is not surprising and is in line with the country's changing forex management policy," said Li Yongsen, an economist with the Renmin University of China, referring to the country's new policy of encouraging households and businesses to hold more foreign exchange.

"The new rules, which reflect domestic enterprises' growing need for foreign exchange usage, will facilitate their overseas business expansion," Li said.

But he said the move would not see an immediate surge of overseas investments by domestic companies, as "the new rules only simplify the procedures for firms to buy foreign exchange."

China is currently encouraging domestic companies to expand into the global market. China's overseas investment amounted to US$64.5 billion by the end of last year, up from US$52.7 billion the previous year, according to figures released by the SAFE last month.

However, it only accounted for a meagre 0.5 percent of global foreign direct investment last year.

Yesterday's move is China's latest step to loosen its once rigid foreign exchange controls, a sign that reform of the foreign exchange regime is gaining steam.

(China Daily June 9, 2006)