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Chinese Authorities to Allow Direct Foreign Investment

7 years ago46 views

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Chinese authorities are loosening rules on foreign investment in China. Their hope is to ultimately have the yuan—also called the renminbi—compete with big international currencies like the U.S. dollar and the euro. They likely see the new rules as a first step.

On Wednesday, Chinese authorities formalized new rules that would allow foreign companies to invest in China using Chinese currency, according to a report by AFP. It's important for Chinese leaders—who likely see it as an initial step to transforming the yuan into an international currency.

This new trial scheme will allow foreign firms to set up companies, make acquisitions, and increase stakes in Chinese subsidiaries. But foreign firms will still be barred from investing in certain industries.

Chinese officials have hinted in the past at their ambition to have their currency compete with, or even replace, the U.S. dollar as the global reserve currency.

Analysts say the new rules will pave the way for issuing yuan-dominated bonds in Hong Kong—and eventually to further policy changes that would make the yuan freely convertible on the world market. More liquidity would mean the yuan is more attractive as a reserve currency.

For a long time, China has done trade deals with foreign countries using U.S. dollars. But over the past few years, they've been experimenting with currency swaps—where nations first swap a large sum of each other's currencies and then use the money to trade together, bypassing the dollar. The most recent of these deals was a major currency swap with Kazakhstan.

However China still has a vested interest in the health of the dollar, the country holds 1.1 trillion dollars worth of U.S. Treasury securities as part of its 3 trillion dollars worth of foreign reserves.

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