New | Banks cautious about easing of funding rule in Shanghai free-trade zone
Move comes amid growing concerns over capital outflows while lenders in the Shanghai free-trade zone see red tape hindering reform progress
Banks in Shanghai's free-trade zone have cautiously welcomed a move from the central bank that will boost the volume of funding they can receive from offshore.
The one-way cracking of the capital account within the zone comes as concerns grow over capital outflow and analysts said the lightening of regulation could be a defensive measure to keep funds from washing outward.
Banks in the zone said red tape and other approval procedures were still slowing real development despite the headline pomp on new reforms.
The latest loosening will let companies borrow up to two times that of their paid-in capital. Banks will be allowed up to five times that level - if they have the right documents.
"This is an important move but banks will still need to open free-trade accounts to take advantage of this," said Kim Jin, a vice-president at Westpac Bank, which has a sub-branch in the zone. "Not many banks have been allowed to do this and at the current rate it could take up to a year to get one."
Some Chinese banks have received such accounts but few foreign players have been granted one, with HSBC Holdings and Citibank counted among the limited recipients.
Regulators last year advertised a simplification process that would sweep up a myriad of applications into a one-stop shop. That was not carried out as pledged, the head of one private equity fund said, leading to questions over how long any newly announced measures will take.
A top executive at one foreign bank with operations in the zone said in practice the move would give lenders greater freedom in replenishing their capital bases, but the regulators' hands-on approach in dealing with companies in the zone could hinder the benefits of liberalisation.
[The new regulation] sounds like it's meant to reinforce the reform message and keep money in the country
One aim of the latest move could be to stem risks that have developed around cross-border lending. In the announcement on Thursday, Zhang Xin, the chief of the Shanghai office of the People's Bank of China, urged officials to closely monitor transactions and fund flows to ward off potential risks.
The new rules, or what the PBOC called "3.0 version" of the zone, will promote a longer tenor for offshore loans to fix a chronic maturity mismatch facing many companies.
The maturity on many syndicated loans for companies based in the zone had been short at three years, compared with five years in Hong Kong, Kim said. But returns on investments can be much slower, adding pressure on repayment.
"It looks like the central bank is trying to reduce this mismatch risk," said Zhou Hao, an analyst at ANZ Bank in Shanghai.
Demand for offshore finance, primarily from Hong Kong, has been high for the past 1½ years. However, as the gap between onshore and offshore yuan narrowed, that demand would likely come down this year, Zhou said. The cost of borrowing is also likely to fall in China this year as the central bank adds liquidity to the market.
Regulators in Shanghai may also hope to patch some capital leakage with the new rules.
Huge capital inflows have stumped customs officials for years as traders speculated on the one-way appreciation of the yuan.
Up to US$1 trillion in hot money or carry trade entered China in the first 11 months of last year, according to an estimate from Kevin Lai, an economist at Daiwa Capital Markets.
As the economy slows and the yuan continues to depreciate this year, the country faces strong outflows of capital.
"[The new regulation] sounds like it's meant to reinforce the reform message and keep money in the country," Lai said.
