China's foreign-exchange authorities yesterday announced a probe into forex acceptance and settlement operations by banks.

Analysts said the investigation was almost certainly aimed at what was believed to be massive inflows of speculative capital into the country this year.

At present, China's foreign-exchange situation is healthy overall, but there are some new phenomena, said the State Administration of Foreign Exchange.

"Inspecting the banks will help (the administration) obtain first-hand information on the flow of forex funds and understand the new characteristics of the forex situation."

The probe will include self-inspections by designated forex banks and on-site check-ups by the commission, the administration said.

China's forex reserves rose by a hefty US$60.1 billion in the first half of this year, outstripping by more than US$25 billion the combination of a US$4.5 billion trade surplus and US$30.3 billion in actual foreign-direct investment.

That discrepancy, many economists suspect, was a result of inflows of "hot money" used to bet on an appreciation in the exchange rate of the renminbi.

Despite calls by some countries for China to revalue its currency, the central government has said it would not let the yuan appreciate, at least not this year.

"That (the discrepancy) is probably what it (the forex probe) is aimed at," said Zhang Yaxiong, a senior analyst with the State Information Centre, a government think-tank.

He said expectations that the yuan will appreciate have been a major force driving the forex inflow into China. The trend has been reinforced by the country's forex administration practice, which traditionally involves stricter controls on the outflow of forex funds, which were seen for years as a precious financial resource.

The anticipation that the yuan will rise led to an unexpected reversal last year in China's balance of international payments. Errors and omissions, a category that largely encompasses unreported flows of funds, shifted to the positive after years of being in the negative.

"The direction of the flow has changed," said Zhang.

The administration said the probe was a move to ensure compliance with forex management rules on the part of banks, help its analysis of foreign capital inflows and trends in the international balance of payments, as well as to clamp down on "illegal cross-border capital flows".

Plans to loosen renminbi controls confirmed

The central bank confirmed Tuesday that Chinese mainland is drawing up plans to loosen controls over renminbi outflow.

If implemented, the proposed policy will greatly boost Hong Kong's status as a potential centre for offshore renminbi business by allowing more yuan to flow into the territory.

It is necessary to "revise the decade-old regulations" on cross-border cash outflow, said Wang Lin, director of the Division of Taiwan, Hong Kong and Macao Affairs under the International Department of the People's Bank of China (PBOC).

Under the current regulations enacted in 1993, an individual Chinese citizen is allowed to carry a maximum of 6,000 yuan (US$725) in cash out of the mainland during each visit.

"We have long been aware of the call for a revision to raise the amount," Wang told China Daily. She noted that the State Administration of Foreign Exchange (SAFC), along with the General Administration of Customs, is in charge of making the feasibility study and drafting the rules.

Cash limit restrains tourists' spending in HK

A spokeswoman with the Information Office of the SAFC said the drafting process is still under way, but declined to give further details.

Despite media speculation that the proposed rules may be implemented at the end of this year, Wang stressed that the central bank does not have any timetable.

"Once the SAFC completes the drafting process, the draft rules will be submitted to us for approval," she said.

Last weekend, Chen Zuo'er, deputy director of Hong Kong and Macao Affairs Office of the State Council, first revealed the proposed programme during his meeting with a Hong Kong delegation.

He reportedly said the move to ease control over cash outflow is partially meant to facilitate mainland tourists' spending in Hong Kong and stimulate the territory's economic recovery.

But the small amount of renminbi cash allowed to be brought is restraining mainland tourists from spending more in Hong Kong.

To address the problem, experts expected the central government to raise the maximum amount of cash that can be brought by each citizen for each visit to as high as 30,000 to 50,000 yuan (US$3,627 to 6,045), according to the Guangzhou-based New Express.

Financial experts predicted that the proposed initiative may increase Hong Kong's circulating renminbi to 300 billion yuan (US$36.27 billion) in two years to heighten its chances of becoming an offshore centre for renminbi trading.

Despite China's capital controls, as much as 70 billion yuan (US$8.46 billion) is thought to be circulating in Hong Kong.

Earlier, both the SAR government and PBOC said the mainland is drafting rules to allow Hong Kong banks to conduct yuan-related business that could be completed in the next few months.

Hong Kong banks will be able to engage in yuan-related business such as deposits, remittance, exchange and credit-card services.

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