China eases foreign exchange controls

Section:

By the Associated Press
via Yahoo News
Tuesday, August 14, 2007

http://news.yahoo.com/s/ap/20070814/ap_on_bi_ge/china_foreign_exchange;_...

BEIJING -- China has scrapped rules that required local companies to convert a portion of their foreign earnings into Chinese currency, the government said Tuesday, in a move that could ease pressure on Beijing's foreign exchange system.

Companies now will be allowed to decide on their own how to use money earned abroad, the State Administration of Foreign Exchange said on its Web site.

Previous rules requiring companies to convert at least 20 percent of foreign earnings into Chinese yuan boosted demand for the currency, increasing pressure for it to rise against the U.S. dollar and other foreign currencies.

The latest change could help to slow the growth of China's $1.3 trillion foreign reserves accumulated by the central bank as it tries to curb pressure for prices to rise by draining money from the economy through bond sales.

"This policy revision is an important reform in foreign exchange management," the agency said on its Web site. "The implementation of the new policy will improve the autonomy and convenience of domestic companies, strengthen companies' capital management, and improve the international balance of payments."

The forced repatriation of foreign earnings by Chinese companies increased the flood of money pouring into the economy from export revenues and foreign investment.

China's current account balance, the broadest measure of its foreign income, rose 48 percent last year to $238.5 billion.

Until 2002, Chinese companies were required to bring home all the money they made abroad and obtain government permission to make new foreign investments. Beginning in 2002, companies were allowed to keep 20 percent of foreign revenues. That was raised to 50 percent in 2004 and 80 percent the following year.

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