Wenzhou tests individual ODI to cool inflation

(China Daily) Updated: 2011-01-11 14:22

An outlet of Bank of Wenzhou. Individuals in the affluent coastal city in Zhejiang province are being allowed to make direct overseas investments. [Photo/China Daily]

SHANGHAI - A move by the city of Wenzhou to allow individual investors to make overseas direct investment is the Chinese government's latest step to cool the surging inflation prevailing in the country and ease currency appreciation, experts say.

"By allowing individuals to directly buy assets overseas, the government is creating a new channel to disperse excessive liquidity in the country, underlining the strong inflationary pressure the government faces this year," said Yuan Zhigang, dean of the school of economics at Fudan University.

The eastern city of Wenzhou, dubbed "the birthplace of China's private economy", has the largest amount of private capital among the nation's cities.

Zhou Dewen, head of the Council for the Promotion of Development of Medium-Sized and Small Enterprises of Wenzhou, estimates that private capital in the city could top 1 trillion yuan ($150 billion), about a thirtieth of China's GDP in 2009.

"Private capital usually seeks high returns, and China's surging inflation this year is partly due to these speculative activities," Zhou said.

Wenzhou's move came after the central government in 2010 raised the reserve requirement ratio for banks six times and the benchmark interest rate twice, to curb inflation.

China's consumer price index for November, a main gauge of inflation, rose by 5.1 percent year-on-year, the fastest clip in 28 months and up 0.7 percentage point from October's 4.4 percent.

Analysts and government officials have said excessive liquidity is the main contributor to China's white-hot price surges.

Fan Gang, a former member of the Monetary Policy Committee at the People's Bank of China, also said in speech in November that opening up foreign investment could provide more investment channels for China's massive amount of household savings, thus curbing accelerating inflation and asset bubbles.

"The trial will also help create stronger domestic demand for China's huge foreign exchange reserve amassed through decades of trade surplus and ease the yuan appreciation pressure," said Fudan University's Yuan.

The Chinese currency has appreciated 22 percent against the US dollar since 2005, cutting into the already narrow profits of the country's exporters. Meanwhile, the General Administration of Customs on Monday reported a $13.1 billion trade surplus for December.

The Wenzhou Foreign Trade and Economic Cooperation Bureau said on Jan 7 that citizens cannot exceed $3 million with any single overseas investment or spend more than a total of $200 million each year, and are not allowed to invest in overseas financial companies.

Zhou Xiaoping, head of the Bureau of Fair Trade for Imports and Exports with Wenzhou's Foreign Trade and Economic Cooperation Bureau, said the move would significantly boost foreign investment by individual investors in Wenzhou.

"There is a huge demand for foreign investment in Wenzhou. In fact, individual investors in the city have been making overseas direct investment for years, but all through undercover or illegal channels," Zhou said.

"Giving them a formal channel will facilitate their overseas investments and help the government monitor and manage these activities."