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Foreign Exchange

China’s SAFE takes further step towards renminbi convertibility

China’s State Administration of Foreign Exchange (SAFE) has ended its policy of requiring foreign exchange attained by companies and households to be sold to the banking system.

In a statement announced just two days after China widened the trading band of the renminbi, SAFE confirmed that the old system had been abolished as the country moves towards full convertibility of its currency. Previously, SAFE required exporters to sell foreign exchange to state banks, but companies have been gradually allowed to hold on to more of their receipts.

Since allowing international trade flows to be settled in renminbi in 2009, the pace of China’s FX reserve accumulation has been more volatile and sensitive to exporters and importers’ expectation of the currency outlook.

Wei Yao, strategist at Société Générale, says the rapid rise in China’s FX reserves in the first half of 2011 and the rare quarterly decline in fourth quarter of 2011 were heavily influenced by this factor.

“Clearly, allowing Chinese companies to hold foreign currency doesn’t mean the end of intervention by the People’s Bank of China in the currency market,” she says.

“But the required reserve ratio [RRR] has been used more often to mitigate the impact of this new swing factor on China’s monetary conditions.”

Yao believes the statement from SAFE supports her view that China will cut the RRR further this year in response to domestic monetary conditions and economic growth deceleration.

“The interesting timing of the statement also seemed to reiterate Beijing’s commitment to move ahead, probably ever faster, on renminbi convertibility and capital account opening,” she says.

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