Shanghai free-trade zone
Shanghai free-trade zone (FTZ) is the first Hong Kong-like free trade area in mainland China. The plan was first announced by the government in July and it was personally endorsed by Premier Li Keqiang who said he wanted to make the zone a snapshot of how China can upgrade its economic structure. Other mainland cities and provinces including Tianjin and Guangdong have also lobbied Beijing for such approvals. The Shanghai FTZ will first span 28.78 square kilometres in the city's Pudong New Area, including the Waigaoqiao duty-free zone and Yangshan port and it is believed it may eventually expand to cover the entire Pudong district which covers 1,210.4 sq km of land.
Shanghai free-trade zone seen as way to boost appeal of panda bonds
Officials hopeful that foreign companies with entities in Shanghai's testing ground will embrace yuan bonds to tap the local debt market
After the pilot Shanghai Free Trade Zone project aimed at smoothing cross-border yuan flows, encouraging foreign firms to sell so-called "panda bonds" in China may be the next big-bang reform move, says Standard Chartered Bank.
"China's central bank has already given banks a lot of hints," Carmen Ling, global head of RMB Solutions, told the South China Morning Post in an interview.
"It's reasonable to anticipate China may next roll out implementation details regarding fundraising activities. For instance, there could be further execution details on how the offshore parent of a free trade zone- based entity could issue Panda bonds onshore," she said.
Since Beijing in 2005 began approving panda bonds - yuan-denominated bonds from non-Chinese issuers - until recently only a few international financial institutions, such as the International Finance Corporation (IFC) and Asia Development Bank, have been approved to issue such bonds. In April, carmaker Daimler became the first and the last company to issue panda bonds.
Such bond issues are politically symbolic rather than driven by pure economic gain as they usually entail greater costs than offshore borrowing given the consistently tight liquidity conditions in the mainland's interbank money market.
Most market watchers feel it remains to be seen how mainland officials can boost the panda bond appetite of foreign companies that have set up entities registered in the free-trade zone to tap the local debt market.
But Ling is optimistic about developments in the zone. "Since the PBOC has issued more details about the Shanghai Free Trade Zone, it has attracted a lot of attention from our clients," she said. "Onshore capital market access will be opened via the zone. We are going to see more and more corporates come to the panda bond market.
"The regulator is still very concerned about the risks of opening up the capital account. They are keener to support clients that would eventually contribute to the real economy."
Ling's global team was set up in mid 2013 to provide timely advisory and yuan solutions to clients across a wide range of products, including transaction banking, foreign exchange and debt capital markets.
Five banks, including Bank of China and Shanghai Pudong Development Bank, launched free-trade accounts that will enable onshore companies to secure cheaper yuan-denominated funding from offshore markets.
Ling said Standard Chartered is in the preparatory stage for the same.
"There are five different accounts and the banks that participate in the scheme need to ensure their back-end systems fully reflect all the accounts in each and every transaction. That could be a challenge for some banks as a lot of them really need to upgrade the systems to comply with the requirement. We are still in the preparatory stage before we can roll out the services," she said.
Apart from upgrading their systems, banks in the zone are also required to adopt a different accounting mechanism under which they have to report the details of the free-trade accounting unit, an arrangement that separates cross-border transactions in the zone from other transactions, said Ling.
"It would be very interesting to see how the onshore and offshore markets converge in a way that onshore market helps the offshore market to grow. If you look at the assets side on the balance sheet, offshore liabilities do not have much usage other than the dim sum bonds and now we see a lot of little windows opening to allow renminbi to go back to China," Ling said.