China to loosen capital controls for foreign firms

[BEIJING] China will loosen capital controls for foreign-funded firms, allowing them to convert all foreign-currency capital into yuan to help them hedge currency risks and cut costs, the foreign exchange regulator said on Wednesday.

Foreign firms in China will be allowed to convert up to 100 percent of their registered foreign-currency capital into yuan based on their business needs, according to new regulations issued by the State Administration of Foreign Exchange (SAFE).

The regulator will adjust the capital conversion ratio based on the country's balance of payments situation, it said without elaborating. The change is effective from June 1.

The latest step, an expansion of experiments in some areas, will "give firms the autonomy in settling their foreign exchange capital and help firms hedge currency risks and reduce costs", the SAFE said.

Foreign firms will be barred from "directly or indirectly" investing such yuan funds in stocks, making entrusted loans or repaying loans to other firms, the regulator said.

But it added that some foreign firms will be allowed to buy stakes in domestic firms by converting their foreign exchange capital into yuan.

China has allowed some foreign firms to use their registered capital to buy stakes in Chinese firms as part of an experiment to further loosen capital controls.

Previously, the amount of registered capital that firms could convert into yuan was limited by the size of their actual transactions. The use of the funds was also strictly controlled by authorities.

China, which aims to boost the yuan's global clout, has been steadily loosening its capital controls to make the yuan fully convertible.

Chinese officials have not given a firm timetable for making the yuan freely tradeable, although the central bank has outlined the task of making it "basically" convertible by 2015.

REUTERS