China Lets Loose; Foreign money is pouring into China, piling up by the billions. Now Beijing has set out to right the balance by freeing its people to take that money abroad.

Byline: Melinda Liu

China's stock markets are smoking, and smart money is flooding into the country; last year foreign direct investment reached nearly $70 billion. Add to that a 2006 trade surplus of $177.5 billion, up 74 percent from the year before, and a tidal wave of hot money (or short-term speculative investments). Together, this ocean of cash has produced enormous reserves of foreign exchange within China--more than $1 trillion, a fat target for critics who say China's voracious appetites threaten the world economy.

Until recently, largely all that money was stuck in the Middle Kingdom. For decades, communist China didn't allow money to go abroad, because it had so little at home. Once it opened up in the early 1980s, China was afraid volatile capital flows would turn its accelerating economic growth into a wild roller-coaster ride. And when Beijing saw capital flight undermine neighboring economies during the Asian financial crisis of 1997, it came to believe even more strongly in controlling outward money flows, and in resisting pressure to make its currency fully convertible. But now that its cash hoard is stirring global controversy, and providing too much money for investment in a dangerously hot domestic economy, China is changing course. "If foreign-exchange reserves keep growing ... China's economy will overheat," says Huang Yanfen, a fi-nancial expert at Renmin University. So in recent months, Beijing has moved to free its homebound capital, allowing both institutions and individuals to move money abroad in unprecedented amounts.

Foreigners can expect a big wave of Chinese cash headed their way sometime soon. Adding together its different sources of capital, controlled by pension funds, insurance firms and wealthy private investors, China could have as much as $75 billion to invest overseas in the next two years, says Shanghai-based senior economist Stephen Green of Standard Chartered Bank. Assuming that Chinese bureaucrats are able to implement the directives from on high, this could mean some $5 billion a month heading out of China over the next year or so. And if Beijing keeps liberalizing its investment rules, those sums could increase.

There are already signs of change, both large and small. Just last week, regulations went into force that raised the amount of local currency individual Chinese can convert into foreign money from $20,000 to $50,000. While the impact of this change on the big picture will be modest, says economist Xia Yeliang at Peking University, the move was intended to inspire ordinary Chinese to start investing abroad, as well as traveling to and even ...