Shanghai free-trade zone

Shanghai liberalises offshore yuan borrowing in free-trade zone

Rules for offshore yuan borrowing in Shanghai's new free-trade zone are set out by People's Bank of China, marking a key financial liberalisation

PUBLISHED : Saturday, 22 February, 2014, 1:15am
UPDATED : Saturday, 22 February, 2014, 1:15am

The mainland's central bank has allowed companies based in Shanghai's free-trade zone (FTZ) to conduct offshore yuan borrowing, taking an initial step towards drastic financial liberalisations inside the high-profile testing ground for further economic reforms on the mainland.

The People's Bank of China unveiled an operational guide yesterday governing cross-border yuan businesses throughout the 28.78 square kilometre zone, the first detailed rules related to financial deregulation inside the zone.

With the guide, banks and companies will finally be aware of what business they can conduct in the zone.

The central bank is set to announce new rules about the long-heralded liberalisation of the yuan's capital account in the zone in coming weeks, according to PBOC officials.

The operational guide on cross-border yuan business reflects Beijing's stepped-up efforts to internationalise its currency while giving a boost to Hong Kong, the dominant offshore yuan centre, as more mainland companies will seek yuan borrowing in the city.

The nearly 10,000 companies based in the zone will be allowed to borrow as much as 1.5 times their registered capital from abroad.

Banks inside the zone have also been encouraged to ease their clients' settling of trade deals by simplifying business procedures.

For instance, firms will be able to centralise their yuan payment businesses for current account items, a move to aid yuan settlements.

"The strong demand for cross-border yuan businesses is there," said Peter Qiu, the general manager of HSBC's Shanghai branch. "We are happy to see the publication of the operational guide which will reinforce the zone's development in future."

Shanghai launched the zone - the first of its kind on the mainland - in September and stressed the importance of financial liberalisations inside the pilot project.

However, the zone came in for increasing criticism about its slow progress as regulators took a long time to finalise detailed operational guides on financial liberalisations.

Tu Guangshao, a vice-mayor of Shanghai, admitted at a press conference yesterday that the city government and the state financial regulators had adopted a step-by-step approach towards regulation amid risk concerns.

"The financial sector is not the central part of the free-trade zone development," Tu said. "But it's still a quintessential part of the zone to support the real economy."

His remarks were seen as an effort to play down expectations of bold financial reforms.

Approval for offshore yuan borrowing is not a groundbreaking move since the PBOC allowed Qianhai, an experimental financial zone in Shenzhen, to conduct such business early last year.

A source with knowledge of the policymaking deliberations about the free-trade zone's financial reforms said the upcoming rules on full convertibility of the yuan had been carefully reviewed by regulators in Beijing, who were still taking a cautious stance towards drastic deregulation.

But he added that liberalisation was an irreversible trend that would be implemented.