Shangai, April 18 - China will allow domestic banks to invest in financial assets outside China with immediate effect, as part of Beijing's efforts to balance its international payments and reduce its huge foreign exchange reserves.
China's currency reserves are the world's largest and its trade surpluses have become a major weapon for critics in Washington to argue that Beijing should let the yuan appreciate more quickly, saying an undervalued currency gives China an unfair export edge.
Beijing gave detail on Tuesday on changes to banks' management of overseas assets for domestic clients, following last week's announcement that Chinese residents would be allowed to invest in overseas financial markets for the first time.
The rules did not specify the products, but the central bank, the People's Bank of China, said on Friday that domestic banks, such as China Construction Bank Corp., China Merchants Bank and Bank of Communications, could help clients to invest in offshore fixed-income products.
"Allowing domestic institutions and individuals to hold more foreign currency assets and invest abroad will help improve the balance of China's international payments," the central bank said in a separate statement on its Web site (www.pbc.gov.cn).
"It will also enhance the level of China's opening to the outside world, and will be an important step to promote the full convertibility of the renminbi," or the Chinese yuan, it said.
China's foreign exchange reserves rose to $875.1 billion in March, fuelled by foreign direct investment in the first three months of 2006 of $14.25 billion and by a first-quarter trade surplus of $23 billion.
Currency and trade issues are expected to top the agenda during a visit to the United States by Chinese President Hu Jintao this week.
CAPITAL CONTROLS
China relaxed capital controls on Friday to make it much easier for individuals and companies to buy foreign currencies and invest abroad, launching -- in principle -- a landmark scheme known as Qualified Domestic Institutional Investor (QDII).
"The QDII scheme should help ease appreciation pressure on the (yuan)," Jun Ma, Deutsche Bank's Greater China chief economist, said in a research note.
"We view this as a major step towards capital account convertibility, and expect further relaxations on currency controls going forwards."
Tuesday's new rules, authorised by the China Banking Regulatory Commission and the State Administration of Foreign Exchange and the central bank, pave the way for a quick implementation of the QDII scheme, analysts said.
Chinese banks could exchange yuan into foreign currencies on behalf of clients within quotas given by the forex watchdog for investment outside the country, according the rules published on the regulator's Web site (www.safe.gov.cn).
There was no announcement on how the quotas would be set.
"We feel China will only gradually open the gates and initial funds allowed to flow outside the country could be limited," said analyst Zhou Lin at Huatai Securities.
Among other requirements, banks must have a bill of health for one year before applying for the business and are ordered to use hedging tools such as forwards to curb risks, the rules said.
Market players expect detailed rules on the investments to be published soon -- possibly as early as this week. ($1=8.02 Yuan)