BEIJING, April 19 -- The government will allow domestic banks to invest in financial assets outside the mainland effective immediately, as part of the government's efforts to balance the country's international payments and reduce its huge foreign exchange reserves.

China's currency reserves are the world's largest and its trade surpluses have become a major weapon for critics in the United States to argue that the Chinese Government should let the yuan appreciate more quickly, saying an undervalued currency gives China an unfair export edge.

The government gave details yesterday on changes to banks' management of overseas assets for domestic clients, following last week's announcement that mainland residents would be allowed to invest in overseas financial markets for the first time.

The rules did not specify the products, but the central bank, the People's Bank of China, said Friday that domestic banks, such as China Construction Bank Corp., China Merchants Bank and Bank of Communications, could help clients to invest in foreign fixed-income products.

"Allowing domestic institutions and individuals to hold more foreign currency assets and invest abroad will help improve the balance of China's international payments," the central bank said in a separate statement on its Web site.

"It will also enhance the level of China's opening to the outside world, and will be an important step to promote the full convertibility of the renminbi," it said.

China's foreign exchange reserves rose to US$875.1 billion in March, fueled by foreign direct investment in the first three months of 2006 of US$14.25 billion and by a first-quarter trade surplus of US$23 billion.

Currency and trade issues are expected to top the agenda during the visit to the United States by President Hu Jintao this week.

China relaxed capital controls Friday to make it much easier for individuals and companies to buy foreign currencies and invest abroad, launching ¡ª in principle ¡ª a landmark program known as Qualified Domestic Institutional Investor (QDII).

"The QDII program should help ease appreciation pressure on the (yuan)," Jun Ma, Deutsche Bank's Greater China chief economist, said in a research note.

"We view this as a major step toward capital account convertibility, and expect further relaxation on currency controls going forward."

Tuesday's new rules, authorized by the China Banking Regulatory Commission and the State Administration of Foreign Exchange and the central bank, pave the way for a quick implementation of the QDII program, analysts said.

Domestic banks could exchange yuan for foreign currencies on behalf of clients within quotas given by the foreign exchange watchdog for investment outside the mainland, according to the rules published on the Web site of State Administration of Foreign Exchange.

There was no announcement on how the quotas would be set.

"We feel China will only gradually open the gates, and initial funds allowed to flow outside the country could be limited," said analyst Zhou Lin at Huatai Securities.

Among other requirements, banks must have a bill of health for one year before applying for the business and are ordered to use hedging tools such as forwards to curb risks, the rules said.

Market players expect detailed rules on the investments to be published soon, possibly as early as this week.

(Source: Shenzhen Daily/Agencies)