HSBC was one of the first foreign banks to raise its flag in the Shanghai Free Trade Zone pilot project. “There are benefits in being there first,” Helen Wong, deputy chairman, president and chief executive officer of HSBC China, told Shanghai Daily. The zone is expected to aid the evolution of the yuan in into an international currency by cutting red tape surrounding use of the Chinese currency.

Q: As a senior executive of a global bank, how do you see the yuan going global?

A: The Chinese yuan will become a very important global currency as China emerges as the biggest country in terms of trade.

We talk to our global clients and find four major factors that influence decisions about whether or not to use the yuan.

First of all, the procedures of yuan transactions must be simple and easy, including payments to suppliers and fund transfers between subsidiaries. Secondly, the money market needs to supply ample liquidity so that clients can raise funds or get a bank loan in yuan when needed.

Thirdly, if a dispute occurs, there needs to be a competent legal system to handle it. For example, there must be reliable arbitration procedures. Lastly, the clients want to be dealing with local professionals who are efficient, have high standards and are generally nice to do business with.

It’s all about convenience, liquidity, risk controls, legal protection and professional business partners. The internationalization of the yuan has made tremendous progress. Now, almost a fifth of China’s international trade is settled in yuan.

On the investment side, interbank market participants, foreign sovereign funds and central banks can invest in the domestic market through the RMB Qualified Foreign Institutional Investors (RQFII) program. Participants include Hong Kong, the United Kingdom, Singapore, France, South Korea and Germany. It is expected to further expand to other countries such as Australia.

Hong Kong was the first offshore market to receive a 20 billion yuan (US$3.3 billion) quota under the RQFII program. That was raised to 270 billion yuan in late 2012. We hope Chinese authorities will grant more quotas for other countries in the near future.

In addition to foreign investors “coming in,” we also want to see domestic investors “going out.” That would boost global adoption of the yuan. Domestic investors should not only include institutional investors and the Chinese sovereign fund, but also Chinese individuals who wish to invest abroad.

For a global currency, free convertibility is important, but interest rates and foreign exchange markets are also vital. To make the Chinese yuan a global currency, the markets need to provide effective interest rates and foreign-exchange hedging tools.

Q: What’s your view on the development of the Shanghai Free Trade Zone?

A: We’ve been watching the progress of the FTZ very closely and have put considerable effort into studying its laws and regulations. We were one of the first foreign banks to enter the zone.

Its framework is aimed not only at boosting yuan internationalization, but also at the development of financial services. Previously, cross-border yuan settlement involved heavy paperwork. The client had to fill out a pile of forms and produce lots of documents to complete transactions.

Financial innovations in the FTZ including centralized cross-border yuan cash management solution simplified those procedures and lowered transaction costs for the clients. For example, let’s say Company A needs to make 50 separate payments to Company B. Previously, we needed to do 50 transactions for the client, one by one. Now we can bundle the transactions and do it in one single transaction. It makes the operation a lot easier.

Q: What are the actual benefits for HSBC of getting the jump on other foreign banks in settling in the zone?

A: Establishing the FTZ sub-branch allows us to be closer to our clients. Companies can visit our sub-branch at any time to get information about new developments in the zone. We find many foreign companies are interested in the FTZ and want to know more. We held a forum in Shanghai recently, attended by many of our global clients. They made a tour to the FTZ and stayed at our sub-branch there for about two hours because they were eager to discuss exciting new opportunities with our bankers.

Q: What are the most frequent questions about the zone that clients ask?

A: Practical questions, like what are the benefits of being in the zone, what are the products HSBC provides that could make their operations in China easier, and if they bank with HSBC in Shanghai, will HSBC Hong Kong be able to lend them money in the FTZ.

We held a yuan forum in Taipei just a few weeks ago and sent our FTZ sub-branch manager and yuan internationalization specialists there to meet the 400 clients who were very interested in developments in the zone.

Q: How does the Shanghai Free Trade Zone differ from other special economic zones, like Shenzhen Qianhai?

A: The Qianhai economic zone is a link with Hong Kong and Macau, located in an area built out of nothing.

By contrast, the Shanghai FTZ comprises four pre-existing free trade zones, ports and logistics parks, where many companies were already located. On top of that, the Shanghai zone is an experiment in line with China’s national reform plans. The essence is to reform the way we do things in order to make business operations easier, to let capital flow more freely across borders and to facilitate the internationalization of the yuan.

It is also consistent with Shanghai’s ambition of becoming an international financial center and an onshore center for yuan product innovation, transaction, pricing and clearing. One of the most important things about every international financial center is regulatory oversight. It takes time to build a solid foundation. A platform built on short notice can easily collapse in one or two risk events. I think the authorities have taken cautious steps in establishing the regulatory framework of the FTZ.

For example, free trade accounts were launched nine months after the FTZ was established. It took that long because the system requires a very high degree of accuracy in order to distinguish zone transactions from other transactions. It’s a specialized system, and it needs to be quick and effective. That’s not easy. But once we pass this stage, everything else will follow through very quickly. The first step is always the hardest.

Q: At the moment, foreign banks in the FTZ cannot utilize free trade accounts. Do they need to be given access?

A: Yes. We are keen to see the first batch of foreign banks allowed to begin the service very soon. But, like I said before, the wait is worthwhile. HSBC has nearly 150 years of history in China, and we always look at the longer term.

Q: What breakthroughs in the FTZ do you and your clients hope to see?

A: The free trade account is one of them. We have a lot of clients asking when they can open a free trade account with us.

Secondly, offshore borrowing is still controlled. There is a cap on the total amount of money a FTZ-based company can borrow from offshore markets. We look forward to some relaxation on that because banks have their own risk controls to decide how much they should lend to the clients.

Additionally, bond issuance in the FTZ requires approval from the authorities, the same as issuance outside the zone. It perhaps could be simplified for zone-based firms.

As the capital market develops in the zone, more liquidity is needed. Companies will want to invest in corporate bonds, obtain a bank loan and trade commodities and precious metals. They will want to leverage on the FTZ to access overseas markets and do hedging for risk control.

I’m sure these issues are all on the authorities’ agendas and will eventuate gradually.