China will allow qualified financial institutions such as commercial banks, insurers and fund companies to invest overseas, the People's Bank of China (PBOC) said in a statement on Friday.

 

Companies and individuals will also be allowed to hold more foreign exchanges, a sign of accelerating reform of the foreign exchange regime.

 

Experts believe the move signals formal approval from the central government for the Qualified Domestic Institutional Investors (QDII) scheme.

 

According to the central bank, commercial banks can now pool domestic yuan deposits from both individuals and institutions and convert them into foreign exchange to invest in fixed-income investment products abroad.

 

Fund companies will be able to use foreign currency holdings held by individuals or institutions to invest in overseas securities markets.

 

Insurers will also be given the green light to invest a certain proportion of their assets in fixed-income and other products abroad, the central bank said.

 

Previous controls on foreign exchange accounts will be relaxed and approval procedures for foreign exchange payments in the service trade will be simplified, it said.

 

Corporations and individuals will be able to buy foreign currencies more easily.

 

Individuals, for example, will be allowed to buy up to US$20,000 in foreign exchange a year, up from the previous quota of US$8,000.

 

The major policy adjustment comes as the country's forex reserve has hit a record high.

 

Fuelled by continuous trade surpluses and direct foreign investment, China's official forex reserves reportedly rose to US$853.6 billion at the end of February, overtaking Japan as the world's biggest holder for the first time.

 

"The eased control on foreign exchanges will help slow down the rapid increase in the country's forex reserves," said Zhang Xuechun, an economist with the Asia Development Bank (ADB).

 

She noted that the previous tight control on foreign exchange outflow and lax restriction on inflow led to fast accumulation of China's forex reserves.

 

Zhang said the policy adjustment will help Chinese companies in need of foreign exchanges improve their management and avoid risks in the foreign exchange market.

 

"It's a significant step in establishing a more market-driven foreign exchange mechanism," she said.

 

"The easing of controls on foreign exchange also shows China's increasing confidence in its foreign exchange management capability," she added.

 

The central bank has taken a number of measures to loosen capital controls recently.

 

One new policy favors a shift from stockpiling foreign exchange reserves in State coffers to letting businesses and residents hold more foreign currency, Wu Xiaoling, deputy central bank governor, said earlier this month.

 

"The People's Bank of China will closely monitor the international balance of payment and adjust policies accordingly to avoid risks and safeguard economic and financial security," the central bank said.

 

(China Daily April 15, 2006)