CHINA eased capital controls on exporters foreign currency earnings over the weekend a move that over time could dampen inflationary pressures and slow growth in the massive foreign exchange reserves that have made the country a heavyweight global investor.
The expansion of a program that allows exporters to keep their foreign currency earnings overseas instead of changing them into yuan was announced Friday and took effect Saturday.
Chinese exporters receive almost all their revenue in dollars and other foreign currencies. In the past, they could use some of that money to cover foreign currency costs such as imported materials for their factories, but they were required to bring the remainder back to China and exchange it with the central bank for yuan. The Chinese central bank s purchases of that foreign currency are the main source of its reserves, which have roughly doubled in the past three years to more than US$2.6 trillion.
The system, which hails from a time when China was more worried about preventing capital outflows, has long vexed the country s monetary authorities.
The influx of foreign exchange has given the government huge global clout as an investor it is the world s largest holder of U.S. Treasury debt. But the flood of cash has also added to the money sloshing around the domestic economy at a time the government is trying to fight rising consumer-price inflation.
Hu Xiaolian, vice governor of the People s Bank of China, recently referred to the exchange of yuan for foreign currency as passive money issuance, saying it had made it harder to control liquidity levels over the past year.
The effects of the change were likely to be gradual. For now, many Chinese exporters could prefer to continue swapping their dollars or euros for yuan because the Chinese currency was rising in value. And, as the new rule would not directly affect the yuan s exchange rate, it was not likely to have a significant effect on China s huge trade surplus, analysts said.
Who would want to hold dollars at this moment, given yuan appreciation expectations and the interest rates on Chinese bank deposits, which are higher than in the United States, asked Morgan Stanley economist Wang Qing.
In the short term, the new rules would help some exporters in trimming costs involved in converting foreign currency to yuan, said Gao Yong, vice president of the China Textile Industry Association. The losses from foreign exchange could be reduced, he said.
The change in policy could also help Chinese companies expand overseas by letting them accumulate a ready store of foreign currency they can use for international investments.
The foreign exchange administration Oct. 1 started a trial program that allowed 60 exporters in four cities and provinces to keep their hard currency abroad. The expansion of the program to exporters nationwide came sooner than some observers expected perhaps because of mounting concerns over so-called hot money inflows and inflation, which accelerated in November to its fastest clip since July 2008.(SD-Agencies)
