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April 14, 2006
China continues to relax capital controls
From Reuters:
SHANGHAI (Reuters) - China relaxed its capital controls on Friday to make it much easier for individuals and companies to buy foreign currencies and invest abroad.
The move will permit President Hu Jintao to tell President Bush when they meet next Thursday that China has made another notable move toward a market-driven exchange rate.
"The deregulation is a concrete step fulfilling the central bank's commitment to gradually ease China's capital controls," said Li Yang, an economics professor who is a former member of the central bank's monetary policy committee.
Under rules announced by the central bank and the foreign exchange regulator, Chinese banks will be allowed to pool yuan deposits and convert them into foreign currencies for investment in overseas bonds.
...
It follows a series of other moves to build a two-way market for foreign exchange. These include the introduction of a system of market-makers, who constantly stand ready to buy or sell the yuan, and the development of derivatives so banks and firms can hedge new-found currency risk.
"Just as central bank officials have been saying, what really counts is reform of the foreign exchange formation mechanism rather than the level of the exchange rate. This move is a vital part of that reform," said economist Yi.
Underscoring the reform drive, China said on Friday it would launch interbank trading in currency swaps on April 24.
Depending on the pace of liberalization, the easier foreign exchange rules provide a juicy business opportunity for Chinese banks and money managers.
"You're giving banks a huge opportunity. They already have a huge depositor base, so marketing is going to be very easy," said economist Stephen Green with Standard Chartered Bank in Shanghai.
Green rated the significance of Friday's announcement at five on a scale of one to 10. "It's giving them the tools they need to start allowing liquidity to move offshore. They've driven a wedge through the capital account," he said.
Faithful readers will note that this is just the latest in a series of events that began last summer even before the actual revaluation. This one also comes with a date (April 24) for the next step. Each step is necessary for this reform to work in the long run, and each step represents real progress. Of course people will want to make the connection between these events and the upcoming state visit, but it seems to me that the visit is not the most important driver here. The precise timing of an announcement like this (any announcement of any substance would suffice) today is no coincidence. However, this is a process that the Chinese know is going to take months and years to see to completion, and it is in their interest to start down that path and move very deliberately. I have long held that the Olympics in 2008 are going to be an important reason for China to promote openness that goes in both directions. Money will need to flow in and out and not remain trapped behind capital controls. Yet they know that this needs to be managed very carefully to avoid too much volatility. For Americans, this is election year politics. For the Chinese, the stakes are higher. Stories like this will continue to trickle out every few weeks for some time to come.
For a summary of what has happened so far, check out all of my China posts.
Posted by William Polley at April 14, 2006 04:07 PM
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