FTZ launches cross-border yuan payment

A China Merchants Bank Co Ltd branch in Shanghai. Five third-party payment service providers have received approval to handle yuan-denominated cross-border payments in the China (Shanghai) Pilot Free Trade Zone.

The China (Shanghai) Free Trade Pilot Zone launched cross-border yuan payment services on Tuesday under the guidance of the People's Bank of China, marking a milestone in the expansion of the international use of the yuan, said analysts.

Five third-party payment service providers have received approval to handle renminbi-denominated cross-border payments in the zone, the central bank's Shanghai head office said.

To carry out cross-border yuan payments, each of the five payment service providers will open a cross-border renminbi account at one of the Shanghai branches of five commercial banks. They are Industrial and Commercial Bank of China Ltd, Bank of China Ltd, China Construction Bank Corp, China Merchants Bank Co Ltd and China Minsheng Banking Corp Ltd.

People's Bank of China Shanghai head office had previously issued guidance to direct financial institutions to carry out cross-border renminbi payment services.

According to the central bank's guideline, companies with payment service licenses, whether they are registered in Shanghai or run subsidiaries in the pilot free trade zone, can provide renminbi cross-border payment services.

The pilot free trade zone was launched in September to expand international use of the yuan and financial liberalization, among other reforms to support free trade.

Analysts said the launch of the service in Shanghai's free trade zone marks a milestone for development of the zone's functions under the facilitation of financial services.

According to the global transaction services organization Society for Worldwide Interbank Financial Telecommunication, the yuan ranked as the eighth most-used currency for payments in December 2013 and overtook the euro as the second most-used currency for trade finance in October last year.

The move is the first of a series of detailed measures expected to be introduced this week after the People's Bank of China announced in December a 30-point guideline supporting financial liberalization in the Shanghai free trade zone.

Jian Danian, vice-chairman of the zone's administration, said the pilot area will be given more freedom in the financial sector before the annual session of the National People's Congress — the nation's top legislature — in March, in addition to Tuesday's milestone.

Upcoming policies are expected to provide more flexibility in interest rates and reducing control over foreign exchange, he said at a lunch meeting organized by AmCham Shanghai, the city's US chamber of commerce, which was attended by more than 150 foreign companies.

According to Jian, there are more than 6,000 companies registered with the zone so far, including about 400 foreign-funded firms, most of which deal with foreign trade.

"But there will be more financial institutions coming in as financial reform advances," he said.

Several foreign banks, including Citigroup Inc, also known as Citi, and Deutsche Bank AG, have already launched automated renminbi cross-border pooling solutions for their clients in the zone, a move that will help multinational companies optimize their cash management and improve capital efficiency.

"We're not creating a separate financial center here in the FTZ. The aim is to better serve the real economy," Jian said, adding that it would be normal for zone-registered banks to provide services elsewhere in the city.

Companies in the zone might enjoy a favorable income tax rate of 15 percent for their overseas equity investment if such a move is approved by the central government in the first half of this year, Jian said.