To allow commercial banks to invest overseas on behalf of their clients, China issued detailed regulations governing such transactions.

 

The People's Bank of China, China's central bank, says the move is designed to promote the international balance of payments and lead to the renminbi being a convertible currency under the capital account.

 

Commercial banks must apply for a license and quota from the China Banking Regulatory Commission (CBRC) and State Administration of Foreign Exchange (SAFE) separately, the rules posted on the central bank's website explain.

 

The rules, which took effect from Monday, did not specify the quota amount a bank is permitted to invest offshore.

 

Only commercial banks which are permitted to offer foreign exchange services, have established an "effective market risk management mechanism" and have overseas investment management capacity and expertise are eligible to apply for a license, the regulations state.

 

In particular commercial banks must not have been punished by the CBRC for asset management irregularities in the past year if they are to qualify, the regulations make clear.

 

They also stipulate that commercial banks must have well-established internal control systems before they can apply for a license.

 

The regulations make it clear that commercial banks should take effective measures to manage foreign exchange rate risks. 

 

Details of the regulations were issued jointly by the central bank, SAFE and CBRC, following a statement last week announcing major capital account reforms.

 

Commercial banks, fund companies and insurers, the statement said, would be permitted to invest in foreign financial markets and this was taken as a sign of acceleration in the country's policy shift in foreign exchange regime reforms.  

 

China's foreign-exchange reserves, propelled by a huge trade surplus and direct foreign investment, hit a record high of US$875.1 billion at the end of last month--up 32.8 percent from the year before.

 

Local and foreign-currency savings reached 31.8 trillion yuan (US$4 trillion) at the end of March. Around a half of this was from households according to central bank figures.

 

"Allowing commercial banks to invest in offshore financial products on behalf of domestic institutions and householders is an important measure to broaden investment channels and improve the international balance of payments," the People's Bank of China said yesterday.

 

"It's also a move to meet individual and institutional demand for overseas financial investment and asset management needs," the central bank said.

 

Starting next month individuals will be permitted to buy up to US$20,000 of foreign currency a year. This is a significant increase from the previous quota of US$8,000, according to the announcement SAFE made last week.

 

(China Daily April 19, 2006)