BEIJING - China on Monday scrapped rules requiring companies to convert part of
their current-account foreign exchange holdings into yuan.
Previously companies were allowed to retain foreign exchanges that were
equivalent to 80% of their revenues in the previous year, plus 50% of their
expenditures. 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 exchanges better, and contribute to a more balanced international
payments situation, according to a
statement on the web site of the State Administration of Foreign Exchange.
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 reached US$1.33 trillion at the end
of June, compared with $1.06 trillion at the end of 2006. The six-month
increment was higher than the whole-year increase of $247 billion last year.
The country's current account, mostly trade surplus, has been a major source of
the bulge. 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, Yan said.
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
exchanges. From 2002, companies were allowed to retain 20% of their foreign
exchange revenues. The proportion was raised to 50% in 2004 and to 80% in 2005.
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