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Relaxing forex control a must
By Zhao Renfeng (Business Weekly)
Updated: 2004-12-07 14:02

Shrugging off the immense pressure of a money crunch, China's policy-makers have come up with an improved policy mix to guide capital flowing in and out of the country.

In what is viewed as one of China's new steps aiming to relax its control on forex system, the People's Bank of China last Thursday tripled its cash limit of local currency a person can carry when entering or leaving the country.

The central bank raised the ceiling to 20,000 yuan (US$2,409.63), from the previous 6,000 yuan (US$722.89) limit, to begin from next year.

"China used to encourage capital inflow and restrict capital outflow. Now we are seeing new signs of policy changes on capital outflow," said Zhang Xiaopu, an official with the international department of the China Banking Regulatory Commission, at a forum jointly sponsored by the HSBC, the Industrial and Commercial Bank of China and the Euromoney magazine.

Analysts have ascribed the relaxing of capital control to China's healthy economic development, growing purchasing power, increasing international exchanges and stable yuan exchange rate.

More importantly, setting up a freer and more flexible forex system is in line with China's integration into the global trade system.

Perplexed with money shortages to power its economy, China, for years, used to tout incentives to raise its coffer of foreign money while setting barriers on capital outflow.

Foreign trade per se was interpreted by many as a good means to secure foreign capital, which has helped the country lift its purchasing power in the world market, and fuel the momentum of the country's magical economy.

Foreign investments, in addition, continue to flood in the country, in anticipation of a rosy business outlook, in the market with huge cheap labour reserves.

China has kept an average annual growth in foreign capital inflow of 28.9 per cent since 1992, and has now become the world's second largest destination of foreign investment, after the United States.

China's foreign currency reserve has been built up rapidly, but never before has the fast-increasing overseas funds baffled the government so much, as too much foreign money has come in too soon.

"Economically, it makes no sense to say 'the more, the better.' This applies to capital inflow as well," said He Fan, a senior researcher with the Chinese Academy of Social Sciences. "We always need to seek an optimum level."

Analysts say the signs have been obvious that the nation's government is working hard to make capital flow more easily. While holding firm to policy to continue to draw in foreign investment, the government is also seeking ways to ease its rigid control on capital outflow.

"It (the policy change) is much like our changing clothes when seasons shift -- we don't wear sweaters in summer," He said.

The Chinese Government, while tightening restrictions on speculative money coming into the country, is loosening controls on capital outflows to ease pressure on the yuan.

The country has lately issued a series of new policies to lift its restrictions on money outflows. Last month, the central bank allowed individual Chinese to transfer assets out of the mainland from December 1, and the bank has also raised the amount of yuan Chinese students going overseas can change into foreign currency.

He said the measures taken by the Chinese Government on the forex system lately are greater than what many people have expected.

"Restricting capital outflows has produced many problems; the policy loosening is healthy for the economy as a whole," said Zhang.

Zhang believes relaxing the rigid forex system would allow the discovery of capital prices, since capital can better fluctuate with global foreign exchange markets.

This will also be helpful to risk controls, capital outflow will transfer the risks to the global forex market.

"Personally, I anticipate that policy relaxing on the forex system will continue," Zhang added.

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