CHINA relaxed its capital controls yesterday, making it easier for individuals and companies to buy foreign currency and invest abroad as it sought to ease frictions with the US over its exchange rate before President Hu Jintao visits Washington next week.

The move fell far short of a complete opening up of China’s capital account but it will allow President Hu to tell President Bush that Beijing is pressing ahead with liberalising its yuan currency when the two meet at the White House on Thursday.

It remains to be seen, however, whether this latest in a series of small, gradual steps by China towards a more market-based exchange rate will help to quell growing political demands in the US Congress for retaliation against China in the absence of a steep revaluation of the yuan.

China’s American critics claim that an artificially weak yuan gives its exporters an unfair competitive advantage. Last year, the US ran a record trade deficit with China that reached $202 billion (£115 billion) on American figures.

The Bush Administration has delayed a key US Treasury report to Congress on whether China manipulates its currency until after President Hu’s trip. However, it is under pressure to take a more aggressive line with Beijing.

Although yesterday’s measures did mark a freeing up of the yuan, the decision to permit greater outflows of funds from China will actually ease some of the existing upward pressure on the yuan generated by the country’s record trade surplus and big inflows of speculative money into the economy.

The changes could also potentially pave the way for Chinese companies to expand their overseas operations and take over other businesses more aggressively, as well as allowing Chinese investors to invest more in Western shares and other assets. Crucially, though, the extent to which companies will be able to move funds out of China was not revealed by Beijing yesterday.

Under the relaxation announced by the People’s Bank of China, the central bank, commercial Chinese banks will be allowed to pool yuan deposits and convert them into foreign currencies for investment in overseas bonds.

Fund management firms may invest individuals’ and companies’ existing foreign exchange holdings in overseas bonds or shares, while insurers will be permitted to invest in foreign fixed-income assets and money market paper.

Individual Chinese will be permitted to buy $20,000 a year, up from $8,000, while firms will be allowed to hold more foreign exchange.

However, economists said that the measures were unlikely for now to trigger any big moves in the yuan, which continues to be seen by markets as a “one-way bet”.

The Chinese currency has crept upwards by a further 1.16 per cent since its modest 2.1 per cent revaluation against the dollar last July, when the peg to the US currency was also replaced by a formal link to a basket of currencies.

The opening up of China’s capital account will also help its authorities to curb inflation amid fears that the economy could overheat. Big inflows of capital, fuelled by China’s huge official purchases of dollar assets to restrain any rise in the yuan, have spilled over into price pressures.

New Chinese figures yesterday confirmed that China’s foreign exchange reserves, boosted by its currency market intervention, rose by $56.2 billion in the first quarter to a record $875.1 billion.

The figures also underlined China’s magnet-like appeal for overseas capital, with about $14.25 billion in foreign direct investment attracted in the first three months of this year.

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