China’s Ministry of Commerce (MofCom) said it will try to implement regulations allowing foreign direct investment (FDI) into China using renminbi as early as September, state media reported. Capital controls currently restrict the flow of renminbi into and out of China. The regulations would provide a channel for renminbi funds acquired overseas through cross-border trade settlement or other mechanisms to be re-invested in the mainland, potentially increasing the role of the renminbi as an international currency. Foreign investors would still be prohibited from investing in securities and financial derivatives, nor can overseas renminbi be use to provide entrusted loans or to repay domestic or foreign loans. It is unclear what effect these policies would have on China’s foreign exchange reserves. Allowing foreign investors to use renminbi rather than US dollars could reduce reserves of dollars, although increased demand for renminbi funds by foreign investors could also produce the opposite effect. MofCom’s move follows last week’s remarks by Vice Premier Li Keqiang that support will be given to Hong Kong enterprises making direct investments on the mainland using renminbi.
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