BEIJING—China’s campaign to turn the tightly controlled yuan into a global currency is crossing a new threshold, as the government plans to make it easier for individuals and companies to invest overseas.
The latest initiative, expected to be announced in the next few weeks by the State Council, China’s cabinet, will allow individual Chinese and businesses to directly purchase stocks, bonds and real estate in foreign markets, removing limits on such transactions, according to Chinese officials with knowledge of the matter. Though initially limited to people and businesses in certain designated free-trade zones, the proposal can be scaled up over time, the officials said.
The step-by-step approach is typical of the leadership’s strategy to keep a firm grip and minimize risks as the economy decelerates, while still pushing forward economic reforms.
Efforts to relax capital controls have gained urgency as Beijing is gunning for the yuan, also known as the renminbi, or people’s currency, to be declared an official reserve currency by the International Monetary Fund later this year. Taken together, the actions—including currency-swap deals with other countries and opening stock-trading channels with Hong Kong—advance China’s long-stated national goal of allowing investors and businesses to move money in and out of the country freely.
“This is a breakthrough,” Hans Shen, a senior executive at Hony Capital Ltd., one of China’s largest private-equity firms, said of the new plan. “But it will be implemented with great caution as the government wants to control risks.”
A press official at the State Council referred questions to China’s central bank, which is spearheading the new initiative. The press office at People’s Bank of China didn’t respond to a request to comment.
Freeing up what’s known as the capital account, or cross-border money flows for financial transactions, creates sizable risks. The government wants to avoid a surge of money moving offshore, further weakening the economy, according to the officials. Rapid inflows, too, would put pressure on the yuan to appreciate even more, making it harder for Chinese exporters to compete in foreign markets.
But relaxing capital controls ultimately should give Chinese people greater opportunities in managing their wealth, open up new businesses for financial-services firms and help China’s transition to an economy driven more by consumption and services.
Ordinary Chinese currently have few options for investing their money. Bank deposits frequently pay less than the rate of inflation. A result is a flood of Chinese savings into stocks and property that has fed boom-and-bust cycles in local stock markets and puffed up real estate bubbles in many cities.
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