China will allow domestic firms to use foreign currency loans from domestic banks to finance operations overseas in a move to promote overseas expansion by Chinese companies, the country's foreign exchange regulator told Reuters on Friday.

The loosening of foreign exchange restrictions on domestic firms is intended to support the "Go Out" policy that encourages Chinese firms to build an overseas presence.

Such firms often face difficulty obtaining financing from foreign lenders, so the rules, which take effect on July 1, aim to make it easier for them to use foreign currency loans from Chinese banks, the regulator said.

Under previous rules, domestic companies were subject to a quota on the transfer of their domestic forex holdings - whether earned directly through exports, purchased on the domestic market - to overseas affiliates, an official from the State Administration of Foreign Exchange (SAFE) told Reuters.

"But beyond the quota, there were still controls," he said.

The new rules, which where sent to selected Chinese banks this week, simplify procedures and eliminate some approval requirements for Chinese firms and their affiliates to transfer foreign currency into and out of the country, for outbound foreign direct investment.

The notice, which has not yet been released publicly, was sent to large banks on Thursday.

The move represents another incremental step by China to reduce its complex system of capital controls, and allow funds to flow more freely into and out of the country.

In March, the central bank expanded the quota for the Qualified Foreign Institutional Investor (QFII) programme under which foreign institutions can invest in China's capital markets.

The new rules also loosen restrictions on domestic firms providing guarantees for loans and other financing arrangements by foreign affiliates, including through the use of onshore assets as collateral. ALB

(Reporting by Gabriel Wildau and Shen Yan; Editing by Jacqueline Wong)

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