Securities firms are likely to be able to invest privately held hard foreign currency abroad under a new government rule.

The new rule, which the government began public consultation on yesterday, should encourage capital outflow and reduce pressure for the yuan to appreciate.

"Securities firms can set out an asset management plan to raise tradable foreign currency domestically and invest it in financial products abroad," says the draft rule, released yesterday by the China Securities Regulatory Commission (CSRC).

The rule has been posted on the regulator's website and public opinion will be sought until July 31.

"The rule will create diverse investment opportunities for domestic capital. Instead of being limited to the Chinese market, investors can now buy into international markets," said Li Yongsen, professor with Renmin University of China. "It will increase investors' investment portfolios and diminish risks."

"Hong Kong will be the first targeted market for domestic brokerages, due to its close connection with the mainland," said Jiang Jianrong, an analyst with Shanghai-based Shenyin Wanguo Securities.

The rule, while bringing brokerages more business, will also be a new challenge for securities firms, as domestic firms will have to familiarize themselves with the overseas market, in which many of them lack experience.

"Leading firms such as China International Capital Co Ltd and CITIC Securities will have an advantage in such business, as they have some overseas experience," said Li.
Besides allowing brokerages to raise funds for overseas investment, the draft rule also includes regulations for brokerages' asset management business.

"Brokerages can set out asset management plans to invest in stocks, bonds market and funds," the draft rule says.

"Asset management is actually a private equity activity, as brokerages are banned from advertising for clients through mass media," said Jiang, adding that the rule will be the country's first regulation on private equity activities.

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