China Loosen Up Capital Controls for Foreign Funded Firms

China Loosen Up Capital Controls for Foreign Funded FirmsChina has finally loosen up capital controls for foreign funded firms and now allows them to convert a foreign currency capital into yuan in order to help them hedge currency risks and to cut costs. According to the new regulations given by the State Administration of Foreign Exchange, foreign firms are allowed to convert up to 100 percent of their registered foreign currency capital to yuan based on their needs.

The foreign exchange regulator will be the one to adjust the capital conversion ratio based on the balance of payments situation starting June 1. This is the latest step, an expansion of experiments in several areas that will give firms autonomy in settling their foreign exchange capital and help firms in hedging currency risk and at the same time reduce costs. Although foreign firms re barred from indirectly or directly investing in such yuan finds in stocks, repaying loans to other firms or making entrusted loans. But some will be allowed to buy stakes in domestic firms by converting foreign exchange capital into yuan.

Foreign firms are allowed to use their registered capital to buy stakes in Chinese firms considering it as an experiment in loosening capital controls. Before the amount of registered capital firms could convert was limited by the size of their transactions and the use of the funds were strictly controlled. Now the country is aiming to boost the yuan global recognition by slowly loosening up its capital control and make the yuan fully convertible.

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