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By Xin Zhiming (China Daily)
Updated: 2007-08-14 09:11

China yesterday scrapped rules requiring companies to convert part of their current-account foreign exchange holdings into the yuan.

Companies used to be allowed to retain foreign exchange equivalent to 80 percent of their revenues in the previous year plus 50 percent of their expenditure; and the rest had to be sold to the State under the mandatory foreign exchange settlement regime.

The new rules, effective immediately, will help companies use and manage their foreign exchange better, and contribute to a more balanced international payments situation, according to a statement on the website of the State Administration of Foreign Exchange (SAFE).

The move will ease pressure on the country's foreign exchange reserves, which continue to pile up, said Zhuang Jian, senior economist at the Asian Development Bank (ADB) in China.

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Reserves rose to $1.32 trillion at the end of June, compared with $1.06 trillion at the end of 2006. The six-month increment was higher than the whole-year increase of $247 billion last year.

The country's current account, mostly trade surplus, has been a major source of the surge.

To ease the pressure from rising reserves, the government now allows companies and individuals hold foreign currencies and invest abroad.

The latest move will work to reduce China's foreign exchange reserves but only in the medium- to long-term, Yan Qifa, an analyst with the Export-Import Bank of China, told China Daily.

In the near term, as the Chinese currency continues to rise, companies will opt to hold the yuan, not the US dollar, therefore choosing to convert their foreign exchange with the monetary authorities.

The new rules may make it easier for some companies to invest overseas, analysts said, but ADB's Zhuang said the country should strengthen capital outflows.

The short-term, abrupt outflow of large amounts of capital may affect a country's financial stability, as shown in the 1997-98 Asian financial crisis, he said.

China has gradually eased restrictions on companies retaining foreign exchange.

From 2002, companies were allowed to retain 20 percent of their foreign exchange revenues.

The proportion was raised to 50 percent in 2004 and to 80 percent in 2005.