China scraps currency rules for companies
From Staff Reports
China on Monday scrapped a regulation that forced companies to convert a portion of their foreign currency holdings into the Chinese Yuan, the AsiaTimesOnline reported this week.
Prior to the rule change, companies could retain foreign reserves equal to 80% of their revenue for the previous year, plus 50% of their revenue. Anything above that total had to be sold to the state under mandatory foreign exchange settlement regulations.
According to a statement by China’s State Administration of Foreign Exchange, the change will help companies better utilize their foreign-currency caches. It’s also supposed to contribute to a “more balanced” international payments situation.
Zhuang Jian, a senior economist at the Asian Development Bank (ADB) in China, told the AsiaTimesOnline that the rule change would slow the growth of China’s foreign reserves, which continue to soar.
Reserves reached $1.33 trillion at the year’s midpoint, an increase of nearly 26% from the $1.06 trillion in reserves China had at the end of December, which was just six months before. And the growth has been accelerating: That six-month gain was greater than the $247 billion increase for all of last year, the English-language China daily’s online edition reported.
Analysts had previously said that foreign reserves were expanding by $200 billion every six months, a growth rate that’s now been officially eclipsed.
China’s soaring trade surplus has been the biggest source of the growth in foreign reserves, acting as a spigot spilling every major currency into that country’s coffers.
Just yesterday (Tuesday), the U.S. government reported that this country’s trade deficit with China jumped 5.7% in June to reach $21.2 billion, the biggest total since January. At the present rate, the United States will easily surpass the 2006 total of $233 billion – and even that was the biggest imbalance ever recorded with a single country. In the first half of this year alone, government reports state that the U.S. trade deficit with China is more than 15% ahead of last year.
The overall trade deficit is also expanding at an alarming rate, according to many economists.
The deficit with China is growing even in the face of a series of major product problems that range from tires to toys, and include high-profile problems with pet food. Just this week, toy giant Mattel Inc. (NYSE: MAT) announced yesterday (Tuesday) that it was recalling 9 million toys, including some die cast cars made in China that may have lead paint problems. The latest recall came less than two weeks after Mattel recalled 1.5 million Chinese-made toys, also because of concerns about lead paint. About 80% of the world’s toys are made in China, making this a huge blow to the industry.
The current account deficit, the currency exchange rates and China’s growing reserves have been a real sore point with officials in both China and the United States. Even so, U.S. elected officials have failed to develop an adequate strategy to negotiate with China. And China’s moves have been largely half-hearted, most experts believe.
China’s growing reserves have induced it to create a state-run private equity fund to buy into ventures in other markets.
The new company-currency rules will help cut China’s foreign exchange reserves, but only in the medium to long term, Yan Qifa, an analyst with the Export-Import Bank of China, told the China Daily newspaper. The reason: In the short run, with the Yuan continuing to rise in value against the dollar, companies will want to hold the Chinese currency, and not one that’s dropping in value, Yan said.
Therefore, the companies will continue converting their foreign reserves, causing China’s currency coffers to grow even more, analyst Yan said.
Interestingly, the new rules may also make it easier for some China-based firms to invest in markets abroad, But ADB’s Zhuang said the country should strengthen capital outflows. He said that the abrupt, short-term outflow of large amounts of capital may affect a country’s financial stability, as shown in the so-called “Asian Contagion” of 1997-98.
China has gradually eased restrictions on companies retaining foreign exchanges. From 2002, companies were allowed to retain 20% of their foreign exchange revenues. The proportion was raised to 50% in 2004 and to 80% in 2005, the newspaper reported.
