Published March 21, 2009

China drafts new forex rules

They are making it easier for banks to convert between foreign currencies

CHINA has drafted rules making it easier for banks to convert foreign currency holdings into other foreign currencies, official media reported yesterday, a move which some dealers said might eventually lead to a cut in US dollar holdings at Chinese banks.

The official Shanghai Securities News quoted unnamed sources as saying the State Administration of Foreign Exchange (SAFE) was seeking banks' comments on the draft rules, which would allow conversions without a complicated regulatory approval process. The reform could make it easier for Chinese banks to expand abroad in the long run, although the global financial crisis has for now hurt their appetite for overseas growth, analysts said. SAFE officials, contacted by telephone, declined to comment.

Banks can already trade foreign currencies in China's spot foreign exchange market without regulatory approval.

But current rules impose strict restrictions, including an approval requirement, on conversion of banks' foreign exchange capital bases from one currency to another, bankers said.

'Allowing banks to convert foreign currencies freely would help to diversify China's forex holdings and reduce the risk of exchange losses from the dollar's volatility,' said Lu Zhengwei, chief economist at Industrial Bank in Shanghai. 'That would surely be a big positive factor for banks.'

A forex dealer at a major Chinese state-owned bank in Beijing said the new rules, if officially promulgated, might cause a steep reduction of dollar holdings at Chinese banks, given the current weakness of the US financial markets and economy.

'Banks would no longer need to think about bureaucratic barriers,' said the dealer, who declined to be named because he was not authorised to speak publicly to media. 'Business decisions would dominate, facilitating our expansion outside China once global market conditions permit.'

About 70 per cent of China's foreign trade is denominated in dollars. By hindering the conversion of those dollars, the current regulations have helped to ensure that the great bulk of Chinese banks' forex capital remains in dollars, bankers said.

The volatility of US markets and the dollar has worried Chinese officials. Premier Wen Jiabao last week noted that China had 'lent a massive amount of capital to the United States', and he expressed concern about the 'security of our assets' there. -- Reuters

Comment .: China's loading up their guns before G20, my opinion they want mostly to put pressure on Buy America provision. The job market is very very important to them, if they want to avoid political unrest. OCDE countries must understand their position if we want to avoid trade war.

China Russia Brasil and possibly India and others will want to preserve jobs and exports are most important to them for that.