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China to Gradually Open its Capital Account in 2005

China will gradually open its capital account in 2005, another step in its plan to make the renminbi currency fully convertible, China Central Television said on February 26, 2005 quoting the country's foreign exchange chief.

China, facing criticism from the West that a cheap renminbi gives its factories an unfair competitive edge, has held its ground against demands it revalue, but has promised to progressively free up trading in the currency.

"We will gradually ease the amount of renminbi that can be exchanged under the capital account, taking another step toward achieving full convertibility of the renminbi," the television quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying.

Guo also said China would support plans by insurance companies, which took in 431.8 billion yuan ($52.2 billion) in premiums last year, to invest in stocks overseas, potentially increasing the outflow of currency to balance huge inflows.

"China will support insurance companies to set up insurance funds or carry out securities investments abroad," he said.

Beijing is studying the much-anticipated plan--known as the Qualified Domestic Institutional Investor (QDII) scheme--but has yet to give a firm timetable.

Last August, China allowed domestic insurers to buy $8 billion in overseas debt, bringing them a step closer to winning permission to invest in overseas stocks.

China has been under pressure from the United States and other countries to free up its currency, known as either the yuan or renminbi.

US manufacturers argue that the current fixed exchange rate of about 8.28 yuan to the US dollar is too low and amounts to an unfair trade advantage.

Beijing has resisted persistent foreign pressure to free up the renminbi and has tried to encourage some capital outflows to help relieve upward pressures on the currency.

The renminbi is convertible on the current account, which covers trade flows, but is subject to tight curbs on the capital account, which covers investment.

China's central bank is being forced to issue huge amounts of renminbi to soak up foreign money flowing into the country.

Much of the inflow is from investors seeking short-term profits based on an appreciation of the renminbi.