Officials in the Chinese city of Wenzhou have launched a new attempt to allow residents of the city to invest directly offshore, a move that would mark a small but significant step toward opening the country's capital account.
Beijing rebuffed a similar proposal by the eastern Chinese coastal city last year, but some officials say they are confident of success this time around.
The opening of the capital account is a key condition for the Chinese yuan to become an international currency.
Early last year, the Wenzhou government took a bold step to give residents more freedom to invest abroad, only to suspend the move due to a lack of consent by the central government. Wenzhou officials then worked out a new proposal--similar to the original one--and submitted it for approval as part of a broader plan to make the city a testing ground for financial reforms, according to local government officials and lobbyists for Wenzhou's private businesses.
Officials and business leaders say they have been encouraged by recent public remarks by some of China's top regulators and decision-makers. Premier Wen Jiabao told a news conference this month that China's central bank and securities regulators are "actively considering" making Wenzhou part of a financial reform experiment involving private capital.
Su Xiangqing, head of the Wenzhou Bureau of Commerce, told The Wall Street Journal on Tuesday that "relevant government agencies," including the country's central bank, have signed off on the investment proposal, which is now awaiting final approval from the State Council, China's cabinet. Mr. Su said he expects the approval to come through in April.
An official at the People's Bank of China referred questions to the State Administration of Foreign Exchange, an arm of the central bank that serves as the country's currency watchdog. SAFE didn't respond to a request for comment.
Zhou Dewen, head of the Wenzhou Small- and Medium-sized Enterprises Promotion Association, a trade group for private entrepreneurs, said allowing individual investments overseas would be in line with the central government's "go out" push. "People in Wenzhou love to invest, but there are always all kinds of foreign-exchange restrictions that make it difficult to invest abroad," Mr. Zhou said.
Analysts say there could still be resistance in Beijing. The government has lately become concerned about excessive capital outflows as China's economy slows, but many analysts don't expect China to suffer a massive flight of capital given its still-solid economic growth compared to the rest of the world. Meanwhile, Beijing is continuing its drive to encourage Chinese businesses to invest overseas, as part of its effort to help diversify its $3.2 trillion worth of foreign-exchange reserves, by far the world's largest.
China's capital account is tightly controlled by the authorities as a way to manage the exchange rate and prevent speculative capital flows. SAFE generally has to approve any sizable amount of currency--foreign and domestic--flowing in and out of the country.
The deliberation comes as the PBOC has allowed greater two-way swings in the yuan's exchange rate this month, in what traders view as a way of testing how the market will value the yuan as the central bank seeks to establish a more flexible exchange-rate regime.
Since June 2010, when the PBOC allowed the yuan to float somewhat, the central bank has intervened frequently to guide the currency higher. But the future direction of the yuan has become increasingly murky as China's trade surplus has eroded in recent months. The yuan has fallen 0.2% against the U.S. dollar so far this year. That compares to 4.7% appreciation in 2011.
The recent fluctuations in the yuan's value, many say, are a sign the Chinese currency is maturing and could lead to a greater willingness among Chinese households to diversify their earnings into foreign currencies. When the yuan falls in value, Chinese nationals may be more inclined to hold dollar assets. But currently, citizens of the world's No. 2 economy can exchange only up to the equivalent of $50,000 a year into foreign currency.
"China has to liberalize its capital account sooner or later to promote international use of the yuan," said Li Wei, a Shanghai-based economist with Standard Chartered. "Nowhere is a better place to start this experiment than Wenzhou," Mr. Li said.
Wenzhou, with a population of around 1.9 million people, was early to embrace private enterprise after Deng Xiaoping launched his "reform and opening" drive in 1978. It rose to prominence over the years by making cigarette lighters but is now known for its heavy concentrations of everything from sophisticated electronics manufacturing to property development.
The city also is known for its emigrants to Europe and the U.S., who have gained a reputation for running restaurants, retail and wholesale businesses in their adopted countries.
Under the proposal spearheaded by the Wenzhou Bureau of Commerce, residents in Wenzhou would be allowed to spend up to $200 million a year--or as much as $3 million a person--to set up, acquire, or invest in nonfinancial companies in foreign markets. Wenzhou residents would also be able to reinvest abroad any profits generated abroad. Still, there could be "revisions" to the details pending the State Council's approval, Mr. Su of the commerce bureau said.
At present, Chinese individuals have very limited channels to invest overseas. They often have to set up companies for that purpose or invest through the so-called Qualified Domestic Institutional Investor program. However, the QDII program differs from the Wenzhou initiative in that it represents a controlled avenue for domestic investors to park their funds in foreign securities, while the Wenzhou plan focus on the ability to buy real assets overseas.
Entrepreneurs in Wenzhou have had their share of trouble. Financial woes among small manufacturers there have intensified since 2010, when China moved to rein in bank lending. Private companies--traditionally underserved by state banks who favor lending to massive state-owned enterprises--have found financing increasingly hard to come by.
To help solve their funding woes, China's policymakers have said recently they are looking for ways to legalize lending practices in Wenzhou by wealthy individuals and private companies, traditionally known as China's "informal lending" system. The process of legitimizing informal finance could involve giving existing underground lenders a license to operate as small-loan companies while imposing deposit collection and capital requirements.
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