China's foreign exchange regulator fully supports the overseas ambitions of local companies and plans to further loosen restrictions on their use of foreign exchange (forex) reserves.

Among other measures, the State Administration of Foreign Exchange (SAFE) is drafting a new forex regulation governing overseas investment by Chinese enterprises to give them greater flexibility in using forex funds, according to Li Dongrong, deputy administrator of SAFE.

The version that is currently in use, which was enacted in 1989, limits companies' expanding into foreign markets.

Its strict restrictions subject companies to forex safety examinations by SAFE and requires them to make a deposit to guarantee the repatriation of profits.

This has played an active role in cracking down on capital flight, promoting international co-operation and maintaining the Chinese renminbi's exchange rate stability in recent years.

China still maintains capital controls since the renminbi is only partly convertible on capital markets, although the authorities have said full convertibility is among reform goals.

Chinese companies, including some leading private firms, are investing in overseas markets in an increasingly diversified manner, with mergers and acquisitions accounting for a growing percentage of total investment.

"The old foreign exchange administration model was out of date," Li said. "We are making preparations (for the promulgation of the new regulation), and hope to promulgate it as soon as possible."

Forex authorities have already started to move in the direction of liberalization.

Li also said SAFE has already significantly simplified forex source verification requirements, and has removed profit repatriation deposits, reducing firms' investment costs.

Since October, 2002, SAFE approved a pilot reform project in selected parts of the country allowing companies to buy forex from banks within a given quota for overseas investment, and retain profits from overseas operations outside the country if they wanted to.

By the end of last year, the administration had approved the reform in 24 provinces, municipalities and autonomous regions, with a combined quota of US$2.48 billion.

Total purchases of forex for overseas investment in those regions totalled US$1.67 billion last year, it said.

"For the time being, the quota is adequate, but the companies will probably move increasingly faster as they get familiar with overseas markets," Li said.

The reform was spread to the entire country in May this year, and the total nationwide quota was raised to US$5 billion, which the official said was not only to meet the needs of Chinese companies going overseas, but a measure to selectively broaden the channels of capital outflow and promote capital account convertibility.

Among other measures to further loosen restrictions, Li said his administration is considering broadening a reform from last year that allowed multinational companies to fund their own overseas subsidiaries by dropping a requirement that the companies must use their own forex funds.

Source: China Daily