Chinese Government Loosening Foreign Exchange Control

According to the General Administration of Customs, China’s trade surplus in May 2006 reached $13 billion. It has been a continuous increase for a period of 25 months. The trade surplus has contributed to the rapid growth of China’s foreign exchange reserve that is now more than $900 billion, the largest in the world. In the meantime, the growing trade surplus and foreign exchange reserve have driven up the pressure of inflation and currency appreciation.

The Chinese government has been weighing different measures to alleviate the pressure of currency appreciation. Its long-term goal is to lift foreign exchange control and allow RMB to be convertible. On April 13, 2006, the People’s Bank of China (PBOC), China’s central bank, issued Announcement No. 5 providing guidance on foreign exchange administration, which signifies a policy change to loosen foreign exchange control. The key points of Announcement No. 5 are (1) to relax the restrictions on foreign exchange current accounts; (2)