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Yuan convertibility, liberal rates to be put on trial at free trade zone
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China yesterday officially unveiled a detailed plan for the pilot free trade zone in Shanghai, a trial run for groundbreaking changes to free up cross-border commodity and capital flows.
China will allow free yuan convertibility under the capital account, interest rates liberalization and cross-border use of yuan in its first free trade zone on a trial basis as long as the risk is controlled, according to a statement posted on the website of the central government.
The government said it will also establish a suitable foreign exchange management system for the zone to facilitate trade and investment.
The FTZ will allow the market to decide prices of financial institutions’ assets, a process known as the securitization of those assets, as policy-makers hope to catalyze further reforms in the world’s second-largest economy through such an experiment.
“The zone is part of the national strategy to accelerate transformation of government function, explore innovation of management mechanism, and promote trade and investment facilitation,” the statement said. “The zone should function as a test field for reforms and an open economy that would provide experience that can be duplicated and promoted nationwide.”
The free trade zone, to be launched tomorrow, integrates four existing bonded zones — Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.
Bold reforms on financial policies make the zone go beyond the scope of trade liberalization and will help Shanghai on its route to become a true international trade and financial center.
However, economists and analysts said financial reforms within the zone will be limited in the early stage and are expected to be rolled out in an incremental approach to control the potential risks as more detailed regulations should be drafted to support the plan.
“Failure to adopt liberalization measures in a proper order may risk China’s overall financial stability,” Liu Ligang, chief China economist at ANZ Banking Group, said in a recent report.
Restrictions on investment and trade will also be eased and liberalization will be promoted in 18 service sectors ranging from finance and shipping to cultural services.
According to the plan, China will allow the establishment of foreign-funded banks and privately funded joint venture banks.
Chinese banks in the zone will be entitled to conduct offshore business.
Chinese banks will be allowed to provide services to depositors who are residents in other countries.
The Shanghai FTZ will also allow eligible foreign-funded financial institutions to set up banks, and to team up with qualified private banks to establish joint ventures.
Enterprises are encouraged to try the free cross-border financing while foreign companies will be permitted to gradually participate in commodities futures trading in the zone.
Laws and regulations governing foreign investment will be suspended for three years, starting next Tuesday, to remove legal barriers for foreign participants.
Expectations have been running high as investors have bid up shares of companies related to the zone.
Banks including the Industrial and Commercial Bank of China, China Construction Bank, the Agricultural Bank of China, the Bank of China and the Bank of Communications have applied to open a branch in the pilot zone.
Shanghai Pudong Development Bank is set to become one of the first batch of lenders to operate a branch in the zone.
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