China is loosening its grip on the use of foreign exchange to encourage domestic firms to make overseas investment, as the country sought to diversify the use of its huge forex reserves.

The State Administration of Foreign Exchange (SAFE), the country's forex regulator, said Tuesday in an online notice that it would allow all kinds of firms in China to invest their forex earnings in overseas branches.

Previously, only large domestic or foreign multinationals are allowed to do so. The other firms are required to submit their forex earnings to the government in exchange for the local currency, contributing to the huge pool of the country's forex reserves.

The SAFE said in the same notice that it would allow firms to use self-owned forex and forex purchased with the yuan, expanding the source of forex that firms could use to invest in their overseas subsidiaries.

The administration sets a quota on such forex uses, which is no more than 30 percent of the firm's equity.

Firms still need approvals from the SAFE to use forex in overseas investment, but the administration said it would simplify approval and forex remittance procedures to facilitate such practices.

The SAFE said the relaxed control was aimed to solve the financing difficulties of Chinese firms when they expand overseas, and such support for overseas expansion was meant to boost exports.

China's forex reserves stood at US$1.9537 trillion by the end of March, the largest in the world. To play it safe, China's huge reserves have usually been invested in low-risk but low-yield assets, such as US government bonds.

(Xinhua News Agency June 10, 2009)