Evolving reforms at Shanghai FTZ push financial opening

Pilot financial liberalization schemes in Shanghai free trade zone (FTZ) will soon include a free trade account and a capital market for foreign investors.

Dai Haibo, deputy director of the FTZ admin committee, set a timetable for the launch of both the free trade account and crude oil futures on Tuesday, at a press conference in Shanghai

Specific rules on the free trade account that allows full convertibility of the yuan and facilitates offshore financing will be rolled out in the second quarter.

Trading of crude oil futures on the Shanghai International Energy Exchange will begin by the end of this year. Bringing crude oil futures to the FTZ is more complicated than authorities imagined and poses challenges to the law and tax codes. Nevertheless, Dia said the zone should boast a multi-tiered capital market for offshore investors.

The free trade account could turn the zone into a truly offshore market where capital can flow freely and the yuan be fully convertible.

It will help Chinese companies, especially those engaged in foreign trade, secure cheaper yuan-denominated funding offshore, where financing costs are lower than that on the Chinese mainland.

China' s central bank has previously eased restrictions on overseas investment by individuals working in the FTZ, by allowing them to open account for overseas investment.

The move has sidestepped the Qualified Domestic Institutional Investors quota scheme for overseas investment and amounts to partial opening of the capital account.

Six months after it was established in September 2013, the FTZ has launched key programs including easing cross-border use of the yuan, liberalizing interest rates on foreign currency loans, facilitating offshore financing and outbound investment.

By the end of February, a total of 1,383 financial institutions had registered in the zone. These include the Shanghai International Energy Exchange, 43 banks, securities and insurance firms, 102 equity financing and financial leasing firms and more than 1,000 investment and asset management firms.

The ceiling for the interest rate on foreign currency deposits of less than 3 billion U.S. dollars was scrapped earlier this month. Bank of China handled the zone's first foreign deposit on March 1 at a negotiated rate between the bank and depositor. Other banks have started accepting small foreign deposits since then.

Commercial banks such as Bank of Communications and China Merchants Bank have helped companies secure off-shore yuan-denominated loans, helping companies access cheaper funding from overseas. A number of Chinese and foreign banks have begun to offer treasury solutions for multinationals. Among them, Shanghai Pudong Development Bank is helping companies shift their yuan funds between onshore and offshore entities without having to seek approval from regulators, improving capital efficiency and hedging foreign exchange exposure.

To broaden the channels for the cross-border yuan use, the central bank approved several third party payment companies. Cross border flow of the currency reached 10 billion yuan in January this year, up 54 percent from a year ago. The volume dropped slightly to just under 10 billion in February on the effect of the Chinese New Year but is still more than 50 percent up from a year ago.

Zhang Yang, director of the Shanghai financial services office said on Tuesday that the Shanghai FTZ will continue to respect market principles and innovation while improving efficiency and transparency, cutting bureaucracy and replacing administrative approval with more effective means.

At a forum in Shanghai this week, municipal officials declared their intent to shorten the list of prohibited FTZ activities by 40 percent this year. Zhou Zhenhua, director of the Shanghai municipal development research center, said the shortened list will remove restrictions over the service sector. "The bar to enter the service sector is usually higher than that set for manufacturing, so the refreshed list should focus on opening up services," he said.

The new list is also expected to be more clear on which areas remain off limits for foreign investors.

Zhou also added that the FTZ will introduce assessments for regulatory performance in areas such as coordination, oversight and effectiveness.

"It is commonly accepted international practice to subject regulatory bodies to assessment by independent agencies. This should also be a feature of the Shanghai zone," Zhou said.

Despite the progress the zone has made, authorities still caution against risks. "Some domestic media have called for discretion in implementing reforms. There are still risks lurking around," Zhou said.

"We have to make sure we can curb the risks that come with each step to achieving greater financial openness while fully implementing the reform package." Dai said.