China has lifted the ban on private foreign exchange investments
in overseas stock markets, a move aimed at easing the pressure of
its swelling foreign exchange reserves.
The only restriction on individuals and companies is the
investments must be made through approved fund managers, the State
Administration of Foreign Exchange (SAFE) said in a notice on
Wednesday.
Such fund management companies must obtain licenses for forex
transactions and invest within the approved quotas.
Investors can only use their forex deposits held in banks and
the transactions must be done through them to facilitate monitoring
by the authorities.
China overtook Japan as the country with the biggest forex
reserve in February. By the end of June, its forex reserves were
US$941.1 billion.
At this rate of increase, it is believed that China's forex
reserve will break the 1,000-billion-dollar-mark by the end of the
year.
A huge forex reserve has exerted great pressure on the Chinese
currency, the Renminbi, to appreciate, and the US has threatened
punitive tariffs on Chinese exports if no further appreciation
occurs.
The ever-increasing reserve also spells risks for its managers,
such as the risk of a major dollar depreciation or collapse. This
is because the majority of China's forex reserves were 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 ratios before public listing.
The government has also eased controls on the possession of
forex by individuals and entities.
Recently, the central bank issued rules allowing individuals to
buy foreign-currency denominated investment products using
Renminbi.
The new policy "further expands 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 the Renminbi," the SAFE notice said.
(Xinhua News Agency September 7, 2006)
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