China announced Thursday that the nation's qualified businesses and banks could settle their overseas direct investment in yuan, a move that could expand the Chinese currency's global reach and ease excessive liquidity domestically.

The People's Bank of China (PBOC), or the central bank, said in a notice on its website that banks and businesses which were allowed to settle cross-border trade in yuan would also be permitted to conduct direct investments overseas using yuan, or Renminbi.

Further, domestic banks could offer those businesses loans for their overseas investment, and investment profits could be sent back to China in yuan. Related procedures would be more expedient, according to the new rules that took effect on January 6.

To carry out the pilot project in an active and steady way could further push for Renminbi's use for cross-border trade and investment, and better support Chinese enterprises working overseas, read the notice.

Zheng Lei, director of the China Merchants Bank's asset management company, said the new measure could make the yuan more convertible in order to make it a true international currency, despite the nation's strict capital controls .

The central bank announced on Tuesday that the nation's foreign exchange reserves topped US$2.85 trillion as of the end of 2010, following robust export growth.

However, concerns are heightened that the massive inflow of foreign currency would push up domestic inflation, which reached a 28-month high in November, as the central bank had to issue the same amount of Renminbi to offset the inflows, which was not good to check excessive liquidity.

Moreover, the hefty stockpile also added pressure for a stronger yuan as the western economies complained a weak yuan gave rise to their trade deficits with China.

Cao Honghui, a financial researcher with the Chinese Academy of Social Sciences, said the new move could help ease domestic inflation and curb China's trade imbalance.

On January 11, China, for the first time, allowed residents of the eastern city of Wenzhou to invest abroad as individuals. An adult Wenzhou native is permitted to buy no more than US$200 million in foreign exchange per year under the scheme.

The following day, the state-owned Bank of China's New York City branch said on its website that it had begun offering yuan-denominated accounts in which holders could exchange up to the yuan equivalent of $4,000 per day, with a limit of $20,000 per year.

Last July, the government allowed the yuan's trading in Hong Kong adjacent to south China's Guangdong Province, in a bid to foster the yuan's nascent offshore market.

Yu Yi, head of the Bank of East Asia's capital center, said the new move would enhance the yuan's overseas presence in the long term as the yuan would be more often used in government dealings and other trade and investment settlements.

Chinese regulators last month increased the number of exporters that can use the yuan to settle cross-border trade, from a few hundred to nearly 70,000.

Qu Hongbin, HSBC's chief economist for China, estimated one-third of China's cross-border trade might be settled in yuan by 2016, as the government pushes for the yuan's greater role in reducing reliance on the US dollar.

"China's currency has been under-represented in global trade and capital markets, when compared to its trade and economic scale. But triggered by various government measures, yuan-settled trade has been growing fast," Qu was quoted in Wednesday' s China Daily.

(Xinhua News Agency January 14, 2011)