Pilot system will monitor capital flow

China will launch a pilot system to monitor cross-border capital flow, in a move seen as a new step toward yuan convertibility.

The State Administration of Foreign Exchange said on Monday it would start a pilot program in Liaoning, Zhejiang (excluding Ningbo) and Shaanxi provinces, and Dalian city in the northeast, to update the data collection system regarding capital transactions.

The program will become effective on Jan 14 and will cover all capital account business processed by foreign exchange regulators, and by banks for enterprises and individuals in the four regions.

"The new system is in accordance with the 12th Five-Year Plan (2011-15) to gradually realize yuan convertibility," the administration said.

It said the system would also help to facilitate capital account transactions and better fend off risks by strengthening monitoring over cross-border capital flow.

Banks and authorities will evaluate the pilot program in the last two weeks of April.

"Such a system is a necessary step to prepare for the opening up of the capital accounts, a goal that was stated clearly in the current five-year plan," said Zhao Xijun, deputy dean of the school of finance at Renmin University of China.

The new system also requires banks to submit certain data that had previously not been collected.

For instance, the Industrial and Commercial Bank of China, the world's largest commercial lender by market value, will be required to hand over data related to loans and external guarantees next year.

By tracking data more extensively and integrating existing systems, the administration is gradually shifting its focus from administrative control to monitoring capital, the Oriental Morning Post in Shanghai quoted an official as saying.

Although China is trying to build a more comprehensive and integrated information system to pave the way for yuan convertibility, the new pilot program cannot be interpreted as indicating greater speed, Zhao said.

China has announced a slew of measures to liberalize its capital accounts in recent months.

In November, the administration said it will clear the way for foreign investor capital to flow in and out of the country more easily by waiving and simplifying regulations.

Starting on Dec 17, foreign investors will not need to get regulatory approval to open bank accounts, remit profits, and transfer money between different domestic accounts.

Earlier this week a pilot program was launched in Shanghai to allow yuan cross-border lending by onshore multinational corporations to offshore parent companies or related companies within the same group.

This was viewed as another significant step toward liberalizing capital accounts.

But some concerns have been aired.

"This is not a good time for China to accelerate lifting its control of capital accounts and making the yuan more convertible, given the large scale of capital inflow into emerging markets since the US announcement of a new round of quantitative ease in September," said Danny Quah, professor at the London School of Economics and a former member of Malaysia's National Economic Advisory Council.

A country must establish a sound market-oriented domestic financial system before opening up capital accounts, he said.

It is vital for emerging markets to cooperate with each other in monitoring cross-border capital flow and in reducing the risks of currency exchange-rate fluctuation, Pan Gongsheng, a deputy governor of China's central bank said in November.