SHANGHAI, China – China’s banking regulators on Tuesday issued rules for commercial banks to invest client funds offshore, an important step toward opening up the country’s tightly controlled foreign exchange regime.
The regulations, which take effect immediately, are meant to widen the investment options available to institutional and individual investors, allowing them to diversify their risks and get better returns, the People’s Bank of China, or central bank, said in an announcement.
“The investment channel for domestic institutions and residents is relatively narrow and it has been difficult for them to use international financial markets to improve asset portfolios, spread risks and improve returns,” it said.
Currently, most Chinese investors are allowed only to invest in domestic assets. The new rules only apply to investments made on their behalf by designated commercial banks.
However, their release follows a decision announced last week sharply increasing the amount of foreign currency companies and individuals can take abroad.
Together, they indicate a renewed loosening of controls, Jonathan Anderson, chief Asia economist for the UBS brokerage in Hong Kong, said in a research report issued Tuesday.
“Simply put, this is the first time that domestic households and firms have been granted official access to overseas securities markets,” Anderson said.
He noted that Chinese hold nearly $4 trillion in local currency cash and domestic bank deposits. Changes in those holdings could have a significant impact on foreign exchange flows and foreign capital markets, he wrote.
The new rules were issued by the central bank, the China Banking Regulatory Commission and the foreign exchange regulator.
The change in policy reflects growing confidence among Chinese regulators in bank management and in the national financial situation. It also is meant to help Beijing to counter the huge surplus in its capital account, the central bank said.
In introducing the rules, the bank noted that China’s foreign exchange reserves, which stood at $875.1 billion by the end of March, were sufficient to cover purchases of foreign currency for overseas investments.
However, banks will have to get regulators’ approval for offshore investments and will face quotas, it said.
China has enforced tight restrictions on trading in foreign exchange for investment purposes, but has pledged to gradually loosen those limits and to allow the Chinese currency’s value to be set by market forces.
Photo credit: gags9999 via Visual Hunt / CC BY
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