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October 31, 2015

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Easing capital curbs to free yuan

CHINESE financial regulators pledge that capital account will be convertible and that the cross-border use of the yuan will expand in Shanghai’s free trade zone under a new plan released yesterday.

The plan covers 40 goals which include piloting yuan convertibility under capital account, driving cross-border use of the yuan in trade, direct investment and financial investment, as well as wider opening of the financial services sectors.

Seven agencies — the central bank, the Ministry of Commerce, the top banking, securities and insurance regulators, the foreign exchange watchdog and the Shanghai city government — unveiled the plan.

There were market worries previously that China could delay its financial reform under pressure from a capital outflow and unstable exchange rates amid a slowing economy.

The new plan therefore marks another step as China continues to ease capital controls as it aims for the yuan to be more widely used globally and be included in the International Monetary Fund’s reserve-currency basket, known as the Special Drawing Rights.

“In our view, this is a brave move as market volatilities are picking up amid the economic slowdown, and this is also a brave response to market speculation that China will slow down opening of the capital account after the stock and foreign exchange market rout,” Zhou Hao, economist at Commerzbank, wrote in a note.

The People’s Bank of China said the next step in the financial reforms will include encouraging securities firms and insurance companies to use a special free trade zone account to manage offshore funding and liquidity.

The plan will help individuals in the zone to invest overseas and allow foreign issuance of onshore yuan-denominated bonds by companies operating in the FTZ.

The plan will also revisit issues such as setting up an international board to trade stocks of foreign companies, setting up an insurance exchange and introducing commodity futures trading in the zone.




 

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