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Forex Rules Scrapped to Stem Liquidity
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The government has scrapped rules that forced exporters to bring home foreign currency.

The State Administration of Foreign Exchange (SAFE) said that effective July 1, it had withdrawn the rules - drafted in the late 1990s - that required exporters to exchange all their foreign exchange earnings with banks in a stipulated period.

Preferential treatment was given to exporters with good records in converting their foreign exchange and punishment for those that did not.

The currency regulator said in a statement on its website yesterday that the rules played a big role in improving the management of foreign exchange settlement; but the changed economic situation necessitates a policy change.

In the wake of the 1997-98 Asian financial turmoil, a large amount of money flowed out of the country, leading to a severe shortage of foreign exchange. So the government introduced a series of measures to ensure enterprises settle their foreign exchange with banks, said Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation attached to the Ministry of Commerce.

"Those measures guaranteed macroeconomic stability," he told China Daily.

Now, the country has US$1.2 trillion in foreign exchange reserves, which are "having an adverse impact on China's macroeconomic stability," Mei said.

More renminbi must be channeled into the market to negate the effect of increasing reserves, which has led to excess liquidity and pushed up asset prices.

Meanwhile, speculative money has been flowing into the country in anticipation of profits as the renminbi is rising.

"The authorities can shift their focus to warding off the influx of hot money," Mei said.

He said it was important for the country to move from a mandatory foreign exchange settlement regime to a more relaxed system where individuals and enterprises can opt to keep their foreign currencies.

(China Daily July 10, 2007)

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