China to open up capital account further

[HenryTo]

Hopefully, in the not-so-far future, Chinese investors can ship their money out of China and buy foreign equities, TIPS, and so forth.
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China to open up capital account further

Updated: 2006-03-01 14:47

China has reiterated plans to make its capital account basically convertible, the Chinese press said Wednesday, a move the government has long promised as it strives to make its currency more flexible.

China has reiterated plans to make its capital account basically convertible, state press said Wednesday.

"China plans to make the yuan convertible under the capital account in the near future although complete convertibility is still a long-term goal," State Administration of Foreign Exchange director Zou Lin was quoted by the Shanghai Securities News as saying.

The government will encourage greater outflow of capital while still maintaining an overall balance on the entry and exit of money, Zou said. Chinese institutional investors would be the first to benefit from the long-promised reform athough changes expected "soon" were still in the research stage, Zou said.

Earlier press reports have said that specially qualified domestic securites firms would be the first to be allowed to invest in overseas markets with their own foreign currency holdings.

The latest comments follow remarks by the central bank last week that China would speed up the process of making the yuan fully convertible under the capital account and relax restrictions on outbound investment.

China's currency is convertible on the current account, which measures trade and financial transfers, but still restricts the capital account, which covers the net flow of capital, in part to protect its fragile banking system.

Liberalising the capital account is part of China's overall reform to make its currency regime more market oriented.

The central bank delinked the yuan from the US dollar last July by revaluing the Chinese unit 2.1 percent and placing the unit in a managed basket of currencies but trading partners are pressuring for greater change.

[rffrydr]

And this "old" article might explain why they need to (and maybe a little about last week's bond move):



Cooling down
Jan 26th 2006 | HONG KONG
From The Economist print edition

China's hot-money inflows evaporate

REMEMBER “hot money”, the speculative capital inflows into China that threatened to overwhelm its currency peg and even to destabilise its financial system? It is hot no more. Portfolio capital flows into the mainland—foreign currency receipts resulting from neither trade nor foreign direct investment—have dropped to $1 billion a month in the fourth quarter of last year. They averaged $8 billion a month from late 2003 until mid-2005.

This slowdown cannot be explained by a sudden withdrawal of funds by international money managers, since these can invest only very limited sums in China. Nor are large Chinese companies suddenly spending a lot more abroad and repatriating less profit: according to Jonathan Anderson, chief Asia economist for UBS, their behaviour has not changed. The best remaining explanation is that the speculators who have been furiously pumping money into China for the past three years have at last given up and gone home.


There are good reasons for this. First, the hot-money folk were always betting on a long-awaited and large one-off revaluation of the yuan to make them a decent profit. But when China at last adjusted its exchange rate last July, the initial revaluation was a tiny 2%. Since then, China's central bank has made sure that the yuan has remained virtually stable against the dollar. The authorities seem to be in no hurry to move again, leaving speculators little imminent prospect of making money. Meanwhile, the speculators' bet on China has become more expensive to finance. Since mid-2004, American interest rates have risen by three percentage points, while Chinese deposit rates have barely changed. Those investors who borrowed in dollars in order to buy yuan (a “carry” trade) have seen their margins squeezed.

Not everyone investing in China simply parked money in a bank account. Those who bet on property are also coming unstuck. In Shanghai, which owing to its liberal regulatory regime has been the chief destination of such speculative funds, property prices fell last spring. And those who invested in Chinese stocks are having to contend with a sharp slowing of earnings growth, from more than 50% a year in 2002-04 to a rate in low single digits.

All this adds up to more than just one in the eye for speculators. The decline in hot inflows will make it easier for the central bank to manage monetary policy since it can scale back its sterilisation operations—printing yuan to buy up all those incoming dollars, then issuing domestic bonds to banks to mop up the extra yuan and thus hold down inflation.

Quite soon, China's trade surplus may start to fall as import growth revives. Couple that with the evaporation of the hot-money inflows and the country's foreign-exchange reserves might rise by $10 billion-15 billion a month, rather than by nearly $30 billion. In other words, the Chinese would spend less on dollars—and America would have less reason to carp about the exchange rate.



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