China eases forex investment rules

Insurers will now be able to invest up to 80 per cent of currency holdings abroad

China took a tentative step towards capital account convertibility yesterday, allowing insurers to invest up to 80 per cent of their foreign-currency holdings overseas with immediate effect.

More than US$7 billion in mainland-held foreign exchange could flow into the international debt and money markets over the coming year under the regulations released by the China Insurance Regulatory Commission and People's Bank of China.

'It's the first time that we've really seen a formal, sizeable relaxation of portfolio flow restrictions on the outward side,' said Jonathan Anderson, the head of Asia-Pacific economics at UBS Securities Asia.

Although insurers are still prohibited from investing in overseas stock markets, the liberalisation is seen as a precursor to the long-anticipated qualified domestic institutional investor scheme, which will enable mainland investors to buy foreign equity instruments.

The move is also interpreted as a gingerly move in the direction of currency convertibility on the capital account, which includes all transactions involving assets and liabilities. Early steps to free the yuan ground to a halt after the Asian financial crisis.

However, the new rules still do not allow for the buying of foreign exchange with yuan to invest overseas.