Central Bank of China To Widen Channels For Capital Outflows

China will widen channels for capital outflows and work toward making the yuan convertible on the capital account, according to a summary of a central bank report posted on the website of its Shanghai branch.

The nation will also increase the yuan’s role in cross- border trade and investment, according to a three-paragraph summary today of the People’s Bank of China’s annual report on international financial markets. The report forecast the global economy will recover slowly this year and that Europe’s sovereign-debt crisis is the biggest uncertainty.

China is loosening controls on capital flows and boosting the use of the yuan overseas to help rebalance the nation’s economy, slow growth in its foreign-exchange holdings and develop an alternative to the U.S. dollar as a reserve currency. The central bank widened the yuan’s trading band for the first time since 2007 this month, a step toward improving the exchange-rate’s flexibility and addressing complaints from trading partners that it’s controlling the pace of yuan gains.

The full report couldn’t be found on the People’s Bank of China website and calls to the central bank in Beijing today weren’t answered.

China’s foreign-exchange reserves have doubled over the past four years, reaching a world record $3.3 trillion at the end of March, central bank data show. The increase, mainly due to the trade surplus, has prompted countries including the U.S. and European Union to accuse the nation of keeping the yuan undervalued, giving exporters an unfair advantage.

The yuan is only convertible on the current account for trade purposes. The government still controls transactions on the capital account for investment purposes including foreign direct investment and securities transactions.
Steps toward loosening controls on the capital account have included allowing foreign investment in yuan raised offshore and permitting Chinese companies to buy assets overseas using the local currency.

China last month chose the eastern city of Wenzhou to start a trial to relax controls on capital outflows that included allowing residents to make direct investments abroad. The central bank this month said it will set up a cross-border payment system within two years to boost use of the yuan in international trade and investment, Bloomberg reported.

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