“The rules are intended to give companies more room to develop overseas and reduce their pain in adjusting growth and models,” Liu Guangxi, an inspector at SAFE’s capital-account department, said at a press briefing in Beijing. “The changes will help China to realize a more balanced management of both capital inflows and outflows.”

China wants to diversify foreign investments to reduce the impact of any drop in the value of US Treasuries, the supply of which is ballooning as President Barack Obama borrows record amounts to fund stimulus spending and end a recession in the world’s largest economy. Premier Wen Jiabao said in March that he was “worried” about the safety of the nation’s US assets.

“The rapid expansion in foreign-exchange reserves is making it more difficult for China to preserve their value,” said Yang Shengkun, a currency analyst in Beijing at China Citic Bank Co., a unit of China’s biggest state investment company. “To encourage companies to ‘go global’ would be a good way” to slow the pace of reserves accumulation, he said.

Record reserves

China, the biggest foreign owner of Treasuries, cut its holdings by US$4.4 billion in April to $763.5 billion, the first monthly decline since February 2008. Its currency reserves, the world’s largest, increased a record $178 billion in the second quarter to $2.132 trillion, the central bank reported Wednesday on its website.

Chinese companies will be able to finance overseas investments by purchasing foreign exchange or borrowing it from local banks, as well as using any existing holdings they have, SAFE said. They will also be permitted to keep income from their offshore investments overseas and reinvest abroad.

Previously, China didn’t allow companies to retain earnings overseas or use local bank loans to invest overseas, Liu said at the briefing.

People’s Bank of China Governor Zhou Xiaochuan last month ruled out any sudden change in the management of the nation’s foreign-currency reserves and reiterated the funds should be invested to ensure “liquidity, safety and returns.” His March proposal for the greenback to be replaced as the world’s reserve currency spurred speculation China may shift its holdings away from dollar-denominated assets.

Policy makers should “moderately” increase their holdings of US Treasuries and purchases this year should not be lower than the total for 2008, Wang Yong, a People’s Bank of China economist, wrote in the China Securities Journal Wednesday.

Source: Bloomberg