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China Allows Forex Investments in Overseas Stock Markets
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China has lifted the ban on private foreign exchange investments in overseas stock markets, a move aimed at easing the pressure of its swelling foreign exchange reserves.

The only restriction on individuals and companies is the investments must be made through approved fund managers, the State Administration of Foreign Exchange (SAFE) said in a notice on Wednesday.

Such fund management companies must obtain licenses for forex transactions and invest within the approved quotas.

Investors can only use their forex deposits held in banks and the transactions must be done through them to facilitate monitoring by the authorities.

China overtook Japan as the country with the biggest forex reserve in February. By the end of June, its forex reserves were US$941.1 billion.

At this rate of increase, it is believed that China's forex reserve will break the 1,000-billion-dollar-mark by the end of the year.

A huge forex reserve has exerted great pressure on the Chinese currency, the Renminbi, to appreciate, and the US has threatened punitive tariffs on Chinese exports if no further appreciation occurs.

The ever-increasing reserve also spells risks for its managers, such as the risk of a major dollar depreciation or collapse. This is because the majority of China's forex reserves were used to buy US treasury bonds.

As part of its efforts to ease the pressure, Chinese authorities have found new uses for the reserve, injecting billions of dollars into its state-owned commercial banks to improve their capital adequacy ratios before public listing.

The government has also eased controls on the possession of forex by individuals and entities.

Recently, the central bank issued rules allowing individuals to buy foreign-currency denominated investment products using Renminbi.

The new policy "further expands the investment channels for foreign currencies in the possession of domestic entities and individuals...This marks an important step in China's opening of its financial sector and in its efforts to press forward with the convertibility of the Renminbi," the SAFE notice said.

(Xinhua News Agency September 7, 2006)


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