The recent decision by the State Administration of Foreign Exchange to extend a modest pilot reform project to three provinces is a small but welcome step on China's long march towards a fully convertible capital account.
Under the terms of the pilot scheme - reported over the weekend - companies in Fujian, Jiangsu and Shandong will find it easier to obtain foreign currency for their investments overseas. The reform was first implemented last year in Zhejiang, Guangdong and Shanghai.
Mainland companies wishing to invest abroad face a daunting array of barriers - including approvals from at least three government departments, investment ceilings, and foreign exchange deposit and profit repatriation requirements.
As always where onerous restrictions are applied, connections count more than competence. Is it any wonder, then, that state-owned enterprises account for 80 per cent of the 6,000 mainland companies with registered overseas investments? Or that many of these investments, from South American gold mines to Central Asian oilfields, have tanked? SOEs are no better at investing overseas than they are at home.
It is a measure of Beijing's paranoia where capital account reform is concerned that each province can only approve US$200 million (HK$1.56 billion) in foreign investments under the scheme. That is a paltry amount, especially when compared to the US$50 billion in foreign direct investment the mainland officially absorbed last year, or to its consistently large trade surpluses.
The problem with barriers like those erected by Beijing against investment flows is that capital always finds ways around them.
