China will let companies invest overseas in yuan in the latest move to expand the currency’s international role and curb dependence on the dollar.
The rules effective since Jan. 6 cover non-financial companies in places where a yuan trade settlement program is taking place, the central bank said on its website today.
The pilot program is “another important step on the way to internationalize the yuan,” said Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole. “Time will tell” whether foreign recipients of investment will accept the currency, he said. currency, he said.
Premier Wen Jiabao is encouraging greater use of the yuan for international trade and investment to reduce reliance on dollars as the Federal Reserve prints money to support the U.S. economy. International trade transactions settled in yuan rose to a record 126.5 billion yuan ($19 billion) in the third quarter of last year, the central bank said in November.
“This represents another step to open the capital account after allowing selected foreign banks to buy Chinese domestic bonds,” said Kowalczyk.
Investment covered by the new rules includes mergers and acquisitions, the central bank said in today’s statement.
The program will be “conducive” to the development of Hong Kong’s offshore yuan market, Norman Chan, the chief executive of the Hong Kong Monetary Authority, said in a statement today.
In the first 11 months of last year, China’s non- financial outbound investment totaled $47.6 billion, according to Commerce Ministry figures.
The program may get traction in places “more receptive” to the yuan, such as Hong Kong, Southeast Asian nations and Russia, said Dong Xian’an, Beijing-based chief economist at Industrial Securities Co. Chinese companies may find U.S., European and Japanese businesses unwilling to accept the currency, “at least initially,” Dong said.
In a separate move, authorities are allowing residents of Wenzhou, a city of about 8 million people in the coastal province of Zhejiang, to make direct investments overseas, according to a local government statement on Jan. 7. Capital outflows may help China to limit asset bubbles and inflation.
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