New policies on capital outflow expected
By Xu Binglan (China Daily)
Updated: 2004-07-01 08:26

New policies to stipulate more relaxed control of capital outflow are expected to be issued shortly as the next step in China's long march towards a fully convertible Chinese currency, according to the State Administration of Foreign Exchange.

"With the new measures, China's capital account will be more open, and that will create conditions for cross-border capital movement and the development of China's capital market," Wei Benhua, vice-director of the administration, said in a speech.

The speech, published by the administration on its website yesterday, was made last week to a business conference in New York.

China's financial authorities have decided to allow some institutional investors, such as the social security fund and insurance companies to invest in overseas markets. But detailed rules have not yet been worked out. The measures Wei talked about could include steps taken concerning these issues.

Foreign exchange flow is categorized as two big items - currency account, which mainly covers transactions of international trade, and capital account, which is about capital flows.

Chinese currency, the renminbi or yuan, is already convertible under the current account, but is still not fully convertible under the capital account.

Chinese officials have said the country will eventually make the yuan a real hard currency, but they will do it with a well-managed approach.

Wei quoted criteria suggested by the International Monetary Fund for a country in making its currency fully convertible: stable macroeconomic conditions, appropriate foreign exchange rate levels, effective financial regulation and adequate forex reserves.

"For China, the following conditions will also be important (in determining when the renminbi can be made a truly hard currency). They are: a healthy financial system, commercial entities that are adaptable to market development, market-oriented interest rates, a more flexible forex rate mechanism and effective macroeconomic control system," Wei said.

He said in opening the capital account, the financial authorities would use a phased approach and follow the principle of doing the easy parts before the hard ones.

For every move financial authorities take to open the capital account, they would make sure that "the risks are controllable and there is room for manoeuvre," Wei said.

Specifically, controls over transactions concerning capital inflow would be relaxed before outflow, long-term flow before short-term flow, transactions with real background before transactions with no real background. Control of financial institutions would be loosened before that of non-financial institutions and private individuals, he said.

China opened its current account in 1996. So far, financial authorities have lifted control over about half of 43 capital account items.

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