WORLD / Wall Street Journal Exclusive

China allows investors to head abroad
Updated: 2006-04-14 11:18

China said it will let companies and individuals make investments overseas for the first time, a policy shift that could temporarily ease immediate U.S. pressure on Beijing to revalue its currency, the yuan.

The news comes ahead of Chinese President Hu Jintao's planned April 20 visit to the White House. While the moves fall short of an outright increase in the value of the yuan -- which the U.S. has called for -- the technical changes could affect China's currency exchange-rate system and may strengthen the yuan's value anyway.

The new investment rules from the State Administration of Foreign Exchange allow professionals to buy overseas stocks and make investments outside of China. The rules also let Chinese individuals buy at least $20,000 in foreign currency each year, while companies will be able to hold more in foreign currencies than currently allowed. The changes take effect May 1.

The Treasury Department, the lead U.S. agency on currency issues, greeted the announcement as a small step in the right direction. "What we're seeing is constant, incremental reform," said Tim Adams, undersecretary of the Treasury for international affairs. But, he added, the Chinese "still have a long way to go, and we would urge them to speed up the pace."

America's strong appetite for Chinese goods has created a large US trade deficit with China. A stronger yuan would be a step toward addressing that imbalance by making Chinese goods more expensive and US goods cheaper for Chinese consumers.

Foreign-exchange analysts said the move could represent the latest step in a gradual move by China toward a more open, market-based currency. It follows Beijing's decision last July to revalue the yuan and let it trade against a basket of currencies, and a move in January to permit foreign banks to trade yuan with each other, rather than using the government as an intermediary.

Many analysts expect the new rules will encourage Chinese investors to invest some of their savings abroad in U.S. Treasurys, European bonds -- and perhaps even into some foreign stocks -- because yields are higher than at home.

But analysts suggested that the amount of money flowing abroad was unlikely to be enough to have a significant impact on currency values or in the stock or bond markets receiving the Chinese money. "The foreign-exchange market is so big it would take a large number of Chinese all sending money abroad over a short period of time to have an effect," said Rebecca Patterson, currency strategist at J.P. Morgan in New York.

Marc Chandler, a currency strategist at Brown Brothers Harriman, noted that U.S. and other foreign companies continue to make big-ticket investments in China, while hedge funds and other money managers are speculating on the currency and investing in the stock markets. These money flows are seen as more powerful than the potential new flows of Chinese money abroad.

Chinese authorities seem to be betting that the private sector's hunger for those assets -- such as U.S. stocks and bonds -- will continue to prop up the dollar. That would give China a ready response to U.S. political pressure: Blame the market, not Beijing.

"To some extent, it's also hoisting the Treasury Department on the petard of its own language about exchange-rate flexibility and market determination, because it's saying, 'We're moving toward the market,' " said William R. Cline, senior fellow at the Institute for International Economics, a nonpartisan Washington, D.C., think tank.

It isn't hard to see why some Chinese money would head overseas. Though China's stock markets have soared this year, they are rebounding from a four-year sell-off and are considered highly speculative and risky compared with more-developed markets abroad. Where China's one-year bank deposit rate has been unchanged for years at 2.25%, Chinese investors could get yields of more than twice that by buying U.S. or European government bonds.

While Americans and others in the developed world are free to invest their money abroad or own foreign currencies, China is among several emerging markets -- along with South Korea, India and Brazil -- that have restricted the ability of individuals to invest abroad.