April 14, 2006: China relaxed its capital controls on Friday to make it much easier for individuals and companies to buy foreign currencies and invest abroad.

The more will permit president Hu Jintao to tell US President George W Bush when they meet next Thursday that China has made another notable move towards a market driven exchange rate.

“The deregulation is a concrete step fulfilling the central bank’s commitment to gradually ease China’s Capital controls”, said Li Yang, an economics professor and a former member of the Central Bank’s monetary policy committee.

Under rules announced by the Central Bank, and the foreign exchange regulator, Chinese Banks will be able to pool Yuan deposits and convert them in foreign currencies in overseas bonds.

Fund management firms may invest individuals and companies’ existing foreign exchange holdings in overseas bonds or shares, while insurers will be permitted to invest in foreign fixed income assets and money market paper. Individuals will be able to buy $20,000 a year up from $ 8,000 and firms will be able to hold more foreign exchange.

By creating demand for dollars, the steps should ease pressure for a further rise in Yuan the Yuan generated by China’s record trade surplus. Beijing said on Friday that its Forex reserves, which had already overtaken Japan’s in February to become the world’s largest, grew to $ 875 billion at the end of March, principally fuelled by foreign direct investment of $ 14.25 billion in first three months and trade surplus of $ 23 billion.

The resulting outflow of Yuan after above announcement of policy is expected to ease the pressure on china for further appreciation of Yuan. This move may not have any major adverse effect on Yuan in wake of wide spread hopes that Yuan may strengthen further. Authorities are yet to announce the quantum of money that can be invested overseas. Depending on this pace of liberalization, and easing of foreign exchange rules, investors are awaiting juicier trade opportunities with China.