Shanghai free-trade zone

Beijing loosens rules on FDI funds in trade zone

PUBLISHED : Saturday, 01 March, 2014, 1:14am
UPDATED : Saturday, 01 March, 2014, 1:14am

Beijing has taken a preliminary step towards liberalising the yuan capital account in the Shanghai free-trade zone, easing controls on foreign currency conversions for foreign direct investment (FDI) while attracting multinational companies to establish foreign exchange asset pools inside the zone.

But the measures fall well short of making the yuan convertible under the capital account, reflecting regulators' concerns about financial risks.

Under the new operating guide issued by the State Administration of Foreign Exchange (SAFE), overseas investors can park foreign currencies in advance in the free-trade zone before clarifying the use for the money as further direct investments on the mainland.

Investors with bank accounts in the zone are also entitled to do conversions between yuan and foreign currencies whenever they want, a move to ease foreign-exchange regulations on FDI projects.

Currently, the mainland has a rigid approval procedure for foreign direct investments. FDI projects cannot be conducted unless investors receive approval from SAFE to exchange the foreign currencies into yuan before using them to set up production facilities or buy local assets.

The investors are required to state clearly the use of the funds and the exact amount of investment into each of the FDI projects before going through the SAFE's review procedure.

"The 60-page operating guide marks a milestone [in China's financial reform]," said Zhang Xin, the head of the People's Bank of China Shanghai branch. "It signals that the reform to make yuan convertible under the capital account has started."

Shanghai launched the free trade project in September as Premier Li Keqiang hoped to use the 28.78 square kilometre zone as a testing ground for economic reforms.

Beijing promised to make yuan fully convertible in the zone to facilitate cross-border fund flows and reinforce Shanghai's efforts to transform itself into an international financial centre.

A liberalised capital account would be of far-reaching significance to the mainland financial system and the national economy since it could result in free capital inflow to the property and manufacturing sectors as well as locally listed equities denominated in yuan.

The SAFE said the new policies would boost the real economy but again urged banks to strengthen risk controls to pave the way for further deregulation.