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China to open capital account in 2005
(Agencies)
Updated: 2005-02-26 14:14

China will gradually open its capital account in 2005, another step in its plan to make the yuan currency fully convertible, China Central Television said on Saturday, quoting the country's foreign exchange chief.

Guo Shuqing, head of the State Administration of Foreign Exchange. [Courtesy of sina.com]

China, facing criticism from the West that a cheap yuan gives its factories an unfair competitive edge, has held its ground against demands it revalue -- but has promised to progressively free up trading in the currency.

"We will gradually ease the amount of renminbi that can be exchanged under the capital account, taking another step toward achieving full convertibility of the renminbi," the television quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying.

Guo also said China would support insurance companies, which took in 431.8 billion yuan ($52.2 billion) in premiums last year, to invest in stocks overseas, potentially increasing the outflow of currency to balance huge inflows.

"China will support insurance companies to set up insurance funds or carry out securities investments abroad," he said.

Beijing is studying the much-anticipated plan -- known as the Qualified Domestic Institutional Investor (QDII) scheme -- but has yet to give a firm timetable.

Last August, China allowed domestic insurers to buy $8 billion in overseas debt, bringing them a step closer to winning permission to invest in overseas stocks.

China has been under pressure from the United States and other countries to free up its currency, known as either the yuan or renminbi.

U.S. manufacturers argue the current fixed exchange rate of about 8.28 to the U.S. dollar is too low and amounts to an unfair trade advantage.

A bank clerk counts 100-yuan notes at a China Construction Bank office in Hai'an, Jiangsu Province in this February 23, 2005 photo. Guo Shuqing, chief of China's State Administration of Foreign Exchange, said China will gradually open its capital account in 2005, another step in its plan to make the yuan currency fully convertible. [newsphoto]

Beijing has resisted persistent foreign pressure to free up the yuan and has tried to encourage some capital outflows to help relieve upward pressure on the currency to rise.

The yuan is convertible on the current account, which covers trade flows, but subject to tight curbs on the capital account, which covers investment.

China's central bank is being forced to issue huge amounts of yuan to soak up foreign money flowing into the country, a process economists say is helping fuel lending and inflation.

Much of the inflow is from investors seeking a short-term profit if the yuan's value is increased.

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