BEIJING—China’s campaign to turn the tightly controlled yuan into a global currency is crossing a new threshold, as the government plans to make it easier for individuals and companies to invest overseas. The latest initiative, expected to be announced in the next few weeks by the State Council, China’s cabinet, will allow individual Chinese and businesses to directly purchase stocks, bonds and real estate in foreign markets, removing limits on such transactions, according to Chinese officials with knowledge of the matter. Though initially limited to people and businesses in certain designated free-trade zones, the proposal can be scaled up over time, the officials said. The step-by-step approach is typical of the leadership’s strategy to keep a firm grip and minimize risks as the economy decelerates, while still pushing forward economic reforms. Efforts to relax capital controls have gained urgency as Beijing is gunning for the yuan, also known as the renminbi, or people’s currency, to be declared an official reserve currency by the International Monetary Fund later this year. Taken together, the actions—including currency-swap deals with other countries and opening stock-trading channels with Hong Kong—advance China’s long-stated national goal of allowing investors and businesses to move money in and out of the country freely. “This is a breakthrough,” Hans Shen, a senior executive at Hony Capital Ltd., one of China’s largest private-equity firms, said of the new plan. “But it will be implemented with great caution as the government wants to control risks.” A press official at the State Council referred questions to China’s central bank, which is spearheading the new initiative. The press office at People’s Bank of China didn’t respond to a request to comment. Freeing up what’s known as the capital account, or cross-border money flows for financial transactions, creates sizable risks. The government wants to avoid a surge of money moving offshore, further weakening the economy, according to the officials. Rapid inflows, too, would put pressure on the yuan to appreciate even more, making it harder for Chinese exporters to compete in foreign markets. But relaxing capital controls ultimately should give Chinese people greater opportunities in managing their wealth, open up new businesses for financial-services firms and help China’s transition to an economy driven more by consumption and services. Ordinary Chinese currently have few options for investing their money. Bank deposits frequently pay less than the rate of inflation. A result is a flood of Chinese savings into stocks and property that has fed boom-and-bust cycles in local stock markets and puffed up real estate bubbles in many cities. The attraction of being included in the IMF’s basket of reserve assets, known as special drawing rights, has helped persuade Chinese leaders to make long-delayed reforms, according to Chinese officials and government advisers. Some controls will remain in place, as many in China credit restrictions with saving the country from the financial crisis that swept through Asia in 1997 and 1998, and preventing shocks similar to the recent sharp drop in Russia’s ruble. The central bank governor, Zhou Xiaochuan, said in a semiannual status report to the IMF in April that China’s strategy is “not based on the traditional concept of being fully or freely convertible.” Rather, he said, it’s “a concept of managed convertibility,” he said The IMF, which has dropped a long-held view that the yuan was undervalued, on Tuesday called on China to “achieve an effectively floating exchange rate” within two to three years. “The market may be surprised in the next few years by how fast China moves on renminbi internationalization and capital-account liberalization,” said Zhiwei Zhang, chief China economist at Deutsche Bank AG. One recent step aimed at freer flows of funds involves permitting Chinese companies registered in areas such as the free-trade zone in Shanghai to borrow overseas for domestic expansion, a move that can help lower their funding costs. For instance, State Grid Corp., a large state-owned electric utilities company in China, has borrowed relatively cheap funds offshore in the past year through its subsidiary located in the Shanghai zone, which was formed in late 2013 as a test bed for financial reforms. The company then used the money to build wind farms in eastern China, according to company officials. Currently, although China permits cross-border flow of currency for foreign trade and investment in factories, the government restricts heavily funds entering and leaving the country for financial investments like stocks and bonds. The latest initiative takes aim at restrictions on financial transactions by companies, as well as the $50,000 a year limit imposed on individual Chinese for moving money out of the country. For years, many Chinese citizens have tried all sorts of ways, some of them illegal, to evade the limit. Providing legal channels for overseas investments allows the government to better monitor risks, many economists say. The plan broadens the channels for outbound investment by allowing individuals meeting certain criteria to invest in foreign securities and other assets on their own, as opposed to having to go through approved asset managers, the officials with knowledge of the plan said. Among the first to benefit will be employees of companies registered in the free-trade zones including the ones in Shanghai and in the Qianhai district of Shenzhen, said the officials. Initially, they would be required to have at least 1 million yuan ($160,000) in assets to qualify. For companies, the plan would raise the cap on securities investments overseas perhaps to as high as $1 billion, from $300 million currently, the officials said. “They love quotas…They’ll make the quotas bigger and bigger but they’ll keep that as a safety mechanism to ensure that things don’t get completely out of whack,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. Still, Mr. Lardy said, “I think they’re within shooting distance” of full convertibility. This article was originally published on The Wall Street Journal
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