China has issued detailed rules allowing commercial banks to invest overseas on behalf of their clients.

The central bank says the move is designed to promote the international payments balance and gradually make the renminbi convertible under the capital account.

Qualified commercial banks must apply for a licence and quota from China Banking Regulatory Commission (CBRC) and State Administration of Foreign Exchange (SAFE) separately, according to the rules posted on the central bank's website yesterday.

The provisional rules, which took effect yesterday, did not specify the amount of the quota a bank is allowed to invest offshore.

Only commercial banks that are allowed to offer foreign exchange services, have established an "effective market risk management mechanism" and have overseas investment management capacity and expertise are eligible to apply for a licence, the rules said.

In particular, commercial banks must not have been punished by the CBRC for asset management irregularities in the past year if they are to qualify for application, according to the rules.

The rules also stipulate that commercial banks must have a relatively well-established internal control mechanism before they can apply for a licence.

Commercial banks should take effective measures to manage foreign exchange rate risks, the rules urged.

The rules, jointly issued by the central bank, SAFE and CBRC, followed a statement last week announcing major capital account reforms.

Commercial banks, fund companies and insurers, the statement said, would be allowed to invest in foreign financial markets, a sign of acceleration in the country's policy shift in foreign exchange regime reforms.

China's foreign-exchange reserves, propelled by huge trade surplus and foreign direct investment, hit a record high of US$875.1 billion at the end of last month, up 32.8 per cent from the year before.

Local and foreign-currency savings reached 31.8 trillion yuan (US$4 trillion) by the end of March, of which around half was from households, according to central bank figures.

"Allowing commercial banks to invest in offshore financial products on behalf of domestic institutions and households is an important measure to broaden the investment channel for households and improve the international balance of payments," People's Bank of China said yesterday.

"It is also a move to meet individual and institutional demand for overseas financial investment and asset management needs," the central bank said.

Starting from next month, individuals will be allowed to buy up to US$20,000 of foreign currency a year, up from the previous quota of US$8,000, according to the announcement SAFE made last week.

Editor: Donald