Curbs lifted on mainland firms' foreign currency holdings

PUBLISHED : Tuesday, 14 August, 2007, 12:00am
UPDATED : Tuesday, 14 August, 2007, 12:00am

Beijing yesterday scrapped rules forcing mainland companies to convert a portion of their foreign currency earnings into local currency, the latest government measure to drain liquidity and ease pressure on the ballooning current account surplus.

With immediate effect, domestic enterprises would no longer be required to convert foreign exchange equivalent to 20 per cent of their previous year's revenues and 50 per cent of their spending, the State Administration of Foreign Exchange said.

'The new rules will make it more convenient for domestic firms to hold and manage foreign exchange, strengthen enterprises' capital management and promote balance in international payments,' SAFE said on its website.

The move is designed to slow the build-up of foreign exchange reserves - at US$1.33 trillion by the end of June. Foreign critics say the enormous reserve is evidence that the mainland bolsters exports by keeping the yuan's value artificially low.

'The measure is targeted at easing the statistical pressure of a high balance of payments, which should in turn reduce the pressure on the central bank to let the [yuan] appreciate,' said UBS foreign exchange strategist Maizam Ibris.

Encouraging exporters to hold on to their foreign currency should also, in theory, curtail capital inflows and reduce excessive liquidity in the economy, which some analysts fear is creating asset bubbles and feeding inflation.

Yesterday the National Bureau of Statistics reported that the consumer price index accelerated to 5.6 per cent year on year last month, up sharply from 4.4 per cent in June.

Analysts say the new policy may not have much impact on either domestic liquidity or foreign exchange accumulation.

'This is an important advance in liberalising the foreign exchange management system. But I am not optimistic that it will promote a balanced external account in the short term and it will not reduce liquidity in any significant way,' said Huang Yiping, Citigroup's chief Asia economist.

The mainland's foreign exchange reserves grew US$266.3 billion in the first half. Last year's current account surplus hit US$250 billion.

Although the new rules would give enterprises greater flexibility to manage their foreign currency earnings, few companies were short of currency to buy foreign goods and fewer still would want to keep a depreciating asset, analysts said.

'The measure will only have a limited impact on foreign exchange reserves because companies do not want to hold foreign currency while the yuan is appreciating,' said Standard Chartered chief economist Stephen Green.

Mr Huang said: 'I think we need a more systematic approach in promoting a more balanced external account, which will include scrapping the rigid exchange rate.'