CHINA has decided to begin allowing some foreign banks in Guangzhou and Shanghai to do business in yuan for the first time. Chen Yuan, deputy governor of the People's Bank of China (PBOC), said he supported the idea of opening the yuan business to a few chosen banks on an experimental basis sometime in the near future, according to director of the Bank of East Asia, David K P Li. Yuan facilities are currently only available from domestic banks, with foreign financial institutions restricted to dealing in foreign currency lending. Mr Li said permitting foreign banks to deal in Chinese currency would greatly increase the amount of capital available for investment on the mainland. 'The Chinese banks know the state companies but they don't know the foreign companies,' Mr Li said yesterday at a conference on investing in China. 'Foreign banks are prepared to take the risks with the yuan and they know the foreign companies, so they are willing to lend a lot more money.' Giving foreign banks the power to lend yuan would also encourage state-owned banks to reform and increase productivity, or face losing business. Mr Li did not specify which foreign banks would be able to lend yuan, but he said he hoped that Guangzhou Mayor Li Ziliu - who was seated alongside him at the conference - would support the Bank of East Asia. 'For the banking reforms, you need to have enlightened officials who are willing to stick their neck out,' Mr David Li said, referring to Li Ziliu. Currently, foreign banks are given preferential tax treatment to encourage them to set up branches, but Mr Li said the foreign and domestic bank tax rates would have to be unified so Chinese banks were not at a disadvantage. 'I don't mind if we are on a level playing field. It's only fair.' Mr Li also forecast that China's currency would become fully convertible before or during 1998 - much sooner than the official prediction of the year 2000. He attributed his optimism to China's successful unification of the yuan in January, to the stabilisation of the exchange rate, and to the quick growth in China's foreign currency reserves, which are now about US$40 billion. 'These factors will give the PBOC the confidence to move the yuan forward. They need to have it fully convertible before China becomes a member of GATT [the General Agreement on Tariffs and Trade].'
