The rules requiring exporters to bring home their foreign-currency earnings by selling them to the central bank for yuan have been an anachronism dating back to when Beijing fretted about capital outflows. Now China sits on foreign-exchange reserves of $2.6 trillion, the rules have gone. A three-month pilot program with 60 exporters has been thrown wide open.
While the idea is to provide another drain tap for the liquidity that is the underlying cause of the country’s inflation and to massage the balance of payments figures, the immediate impact is likely to be slight. For one, the yuan is being allowed to rise against the dollar, so there is no forex incentive for firms to leave their money in dollars right now, and probably not for the years it will take for the yuan to rise to what would be a market-set level. Exporters will have to set off the possible currency appreciation against the transaction-cost savings from not having to undergo the burdensome process of converting their dollars into yuan.
Nor will scrapping the rules do anything to deal with the hot money coming into the country, a more troubling issue for policymakers as it tends to be more short-term and volitive than export earnings. Longer-term, letting exporters manage more of their foreign-exchange earnings will let China’s ambitious multinationals build up war-chests for international operations and expansion.