China City to Let Individuals Invest Abroad as Capital Outflows Encouraged

China’s eastern city of Wenzhou will allow individuals to make direct investments overseas as the government encourages capital outflows to ease pressure on inflation and currency appreciation.

Citizens cannot exceed $3 million with any single investment abroad or spend more than a total $200 million each year, and may not invest in overseas financial companies, according to a statement on the Wenzhou Foreign Trade and Economic Cooperation Bureau’s website posted on Jan. 7.

China’s central bank last year ordered lenders to set aside greater reserves six times and raised interest rates twice, trying to curb accelerating inflation and asset bubbles partly driven by capital inflows. The customs bureau today reported a less-than-forecast $13.1 billion trade surplus for December ahead of a Jan. 19 meeting, where U.S. President Barack Obama may press counterpart Hu Jintao for more gains in the yuan.

“It’s a small step in the further liberalization of the capital account,” said Lin Songli, a Beijing-based analyst at Guosen Securities Co. “It has little impact for Wenzhou itself as people there have been doing that already, but it will be significant if it is applied nationwide.”

The Chinese currency is still not freely convertible under the capital account, which includes foreign direct investment and securities transactions. The government shelved a plan that was first announced in August 2007 to allow local individuals to buy Hong Kong stocks due to potential risks.

‘High Enough’
The State Administration of Foreign Exchange will this year “steadily” promote reform to the yuan’s capital-account management, the currency regulator said in a statement on Jan. 6 without providing details. China’s foreign-exchange reserves, the world’s largest, surged by a record to $2.65 trillion at the end of September.

The overseas investments can include buying stakes in existing companies, setting up new businesses, and acquisitions, the Wenzhou government’s statement said. The combined investment by more than one investor in a single project can’t exceed $10 million.

Local residents had already been making overseas investments by obtaining foreign exchange through unauthorized channels, and the pilot program will enhance regulation of such investments and protect investors’ rights, according to the statement. Investors can buy foreign exchange from the regulator under the trial.

The quotas are “about high enough” to allow Wenzhou investors to find profitable projects in their traditional areas of expertise such as leather, clothing and toys, which are typically labor-intensive manufacturing, Lin said.

Wenzhou, a city of about 8 million people in the coastal province of Zhejiang that borders Shanghai, had 32,595 yuan in per capita gross domestic product in 2009, about 30 percent more than the national average.

--Sophie Leung, Zhang Dingmin. Editors: Malcolm Scott, Linus Chua

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Bloomberg News at gturk2@bloomberg.net