THE Shanghai branch of China's central bank is moving to allow domestic banks to borrow foreign exchange from one another, says a China economist. W.I. Carr associate director Joe Zhang said that for the first time domestic banks would be able to acquire foreign exchange without buying it in the interbank market or issuing overseas bonds. China could draw on its own ballooning foreign exchange reserves, which stood at US$69.8 billion last month, instead of borrowing expensive money offshore. Mr Zhang said the People's Bank of China should be able to finish drafting a new policy relatively quickly because allowing banks to borrow from the domestic pool of foreign exchange reserves would have no impact on China's money supply. 'This is a positive development for China's banking industry,' he said. 'Chinese institutions have been very keen to go abroad to raise funds because many people working in them had a personal agenda. 'They wanted to see the world, but now they are becoming more practical.' China's overseas bond issues fell 70 per cent to $600 million, compared with $2 billion last year, in the face of growing foreign exchange reserves and the difficulty in raising matching funds in yuan because of the Government's tight credit policy. The Bank of China, which issued $850 million in overseas bonds last year, has not issued any this year. China's foreign exchange reserves have risen rapidly since the central government unified the yuan's exchange rate in January last year, reaching $51.6 billion by the end of the year. Worries that the yuan would tumble in the aftermath of the unification prevented the People's Bank of China from considering permitting banks to borrow foreign exchange from each other earlier. The yuan has risen against the dollar, from about 8.7 to about 8.3 yuan. Merrill Lynch senior economist Nicholas Kwan said that despite the growth in foreign exchange reserves, their equitable distribution was a problem. 'China's pressing need is not to tap more funds, but to make better use of the money it already has,' he said. 'Some people are short of capital but have no authority to raise more overseas, while others are sitting on huge reserves.'