China eases certain Forex rules

China’s State Administration of Foreign Exchange (or “SAFE”), which sets foreign currency regulations in China, announced yesterday a series of new rules to take effect August 1 which indicate further easing of general Forex controls in China.

The new rules are aimed mainly at making it easier for Chinese companies to move money and invest overseas, as well as foreign banks operating in China to meet their local Yuan currency requirements. However, the new rules have wider implications for those doing business in the other direction (i.e. foreign companies selling and investing into China), and those involved in currency trading involving the Yuan.

Specifically, the new regulations would allow domestic (Chinese) companies with overseas investment plans to:

  • register the source of their foreign exchange financing after their investment overseas, instead of obtaining approval beforehand, as currently required,
  • finance overseas investment with domestic foreign exchange loans, purchases of foreign exchange with Yuan, their own foreign currency funds and profits gained abroad,
  • transfer funds abroad before their overseas projects were established, after gaining approval from SAFE, up to 15% of the total expected project investment.

At the same time, foreign banks operating in China will now be allowed to convert into Yuan, without prior approval, an amount that they require for their normal business operations, on a monthly basis, up to a 5% increase from the previous month. Foreign banks currently must convert foreign currencies into Yuan only as needed for individual transactions.

What these changes mean short-term is more Forex transactions and volume between Yuan and various leading currencies. Longer-term, we believe it is another baby step the Chinese are taking in opening their currency and trading markets. As we wrote in our June 2 report, these moves and others (such as now allowing Yuan options trading) are still a long way from allowing margin retail trading, but definitely seem to indicate that the Chinese are rapidly moving toward a more open currency regime.

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