Yuan FDI curbs clarified

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The People's Bank of China sent a notice to financial institutions two weeks ago to specify its limits on yuan-denominated foreign direct investment, saying it is restricting such accounts from investing in securities, derivatives and property, a senior central bank official said on Wednesday.

"It's not a case of tougher standards, because before the notice such investment had already been processed in that way. Instead, the notice was trying to clarify the existing rules, and make them easier to implement in a unified way in different regions," a central bank official familiar with the matter told China Daily.

The official made the comments in response to a report appearing in the Shanghai Securities News.

Capital in yuan start-up accounts from foreign investors cannot be used to bid for land or purchase property, the newspaper reported on Wednesday, citing a notice from the central bank.

Yuan in accounts set up after the FDI is launched cannot be invested in securities, financial derivatives, asset management products, and property purchases that are not for the foreign investors' own use.

The new rules also prohibit foreign investors from using yuan loans borrowed offshore to invest in Chinese property developers, it said.

Investors are only allowed to set up one start-up account and must separate it from reinvestment accounts, said the notice.

"These rules have been already implemented in the past, and we didn't choose a special time to announce the notice," the official said, adding that is not related to recent changes regarding economic indicators and cross-border capital flows.

To further globalize its currency, China issued rules for allowing foreign direct investment with yuan legally obtained offshore in October.

Applications for yuan FDI worth 300 million yuan ($47 million) or above have to be submitted to the Ministry of Commerce for approval.

A guideline issued in June 2011 by the central bank excluded yuan-denominated FDI in sectors that are restricted or are significantly related to the nation's macroeconomic management.

Foreign investors may still use yuan-denominated capital to make other investments in China, such as business acquisitions, stake purchases, investor lending and the establishment of new companies, according to the guideline.

Banks processed yuan-denominated FDI valued at 90.7 billion yuan last year, according to figures from the central bank.

FDI in China increased 9.7 percent year-on-year last year, while FDI in real estate surged 12.1 percent.

China's softening economy has aroused concerns that the authorities may have to relax property market curbs and spur fixed-asset investment.

First-quarter GDP growth of 8.1 percent was the lowest in almost three years, and analysts forecast that it will fall below 7.5 percent in the second quarter.

China welcomes more foreign capital, but doesn't want more inflows to the real estate market, Bloomberg quoted Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd, as saying.

The government must "unswervingly" continue its property curbs and prevent prices from rebounding, Premier Wen Jiabao pledged on the weekend.

Chris Leung, senior vice-president and senior economist at DBS Bank (Hong Kong) Ltd, said: "All recent official statements were unanimous that stringent restrictions on the property market will remain.

"If that is the case, aggressively loosening monetary policy will contradict its goals. Pent-up demand for property accumulated over the past two years can be explosive."

He said the fastest way to boost growth will be to loosen credit controls and property market curbs.