China would let domestic firms keep more foreign currency earnings as part of gradual reform of the country's strict currency controls, the foreign exchange regulatory body said last Friday.

The relaxation of the rules comes as China is forced to issue a huge amount of local yuan currency to soak up a flood of foreign money, a process that is helping to fuel rampant bank lending and drive inflation.

It is the latest step in government efforts to ease upward pres-sure on the yuan, which is pegged at about 8.28 to the U.S. dollar under a long-standing policy.

As expectations have climbed in recent months that the government may adjust the exchange rate this year, speculators have rushed to cash foreign currency for yuan in hopes that a rise in the yuan's value will yield quick profits.

Giving a rough gauge of the situation, China's foreign exchange reserves swelled by US$37 billion, or 9 percent, in the first three months of this year, despite an US$8.4 billion trade deficit.

After subtracting foreign direct investment of about US$14 billion, that left up to US$23 billion, economists said, probably represented speculative "hot money".

The new changes, to take effect May 1, will allow companies whose foreign-currency spending is more than 80 percent of their foreign-currency earnings to keep up to half of that money without changing it into yuan.

Firms whose foreign-currency spending is less than 80 percent of foreign-currency earnings would need to change no more than 70 percent of the income into yuan, the State Administration of Foreign Exchange said.

Previously, companies could only retain up to 20 percent of their foreign-currency income. That limit was set in October 2002.

Friday's move also came a day after China reported first-quarter gross domestic product had been 9.7 percent higher than a year earlier, showing blistering growth that many economists see as a prelude to resurgent

(Shenzhen Daily April 19, 2004)