Shanghai free-trade zone

Proposals announced to boost Shanghai Free Trade Zone

PUBLISHED : Monday, 02 December, 2013, 11:37pm
UPDATED : Tuesday, 03 December, 2013, 10:31am

The mainland's central bank has announced detailed reform guidelines to support the Shanghai Free Trade Zone, but foreign investors are still questioning just how free the zone will be.

In a six-page report that included 30 detailed instructions, the People's Bank of China said yesterday it would allow residents of the zone - seen as a test bed for liberalising the financial sector - to set up "resident free trade accounts" in both domestic and foreign currencies, and would allow yuan to be fully convertible under those accounts "when the time is ripe".

The 29 sq km zone, the first of its kind on the mainland, was set up two months ago and the guidelines suggest it will offer benefits that Beijing has been reluctant to offer other pilot areas.

For example, "qualified" individual investors will be able to make various foreign investments, including trading overseas securities, a landmark measure that the eastern city of Wenzhou has been lobbying over for years without gaining final approval from Beijing due to capital flight concerns.

Firms within the zone will also be able to borrow money from overseas lenders and use the proceeds outside the zone, a big relaxation compared with Shenzhen's Qianhai , which says that non-financial firms that borrow offshore yuan must use the proceeds in that zone.

However, the blueprint is still seen by economists as "conservative" because it does not give a clear time frame for the yuan's full convertibility and avoided mention of widely anticipated rules on deposit rate relaxation.

"The guideline is milder than what the market has expected," said Liao Qun, chief economist and head of research at China CITIC Bank International. "It seems a conservative view is dominant in the decision-making body and they don't want to try bold financial reforms."

The market had been expecting Beijing to try scrapping - or at least raising - the cap on bank deposit rates to allow banks to pay savers market rates on deposits in the zone.

However, the central bank only said it would lift the cap on rates for some small foreign-currency deposits when "conditions are ready" and allow certain qualified institutions to issue certificates of deposit.

"The overall liberalisation process will happen in a controlled and gradual manner, and will be closely monitored by the PBOC through the special account arrangement," said Barclays economist Chang Jian.

Official data shows 38 foreign firms are among the roughly 1,400 to have registered in the zone, reflecting external investors' doubts over the level of Beijing's commitment to pushing ahead with reform.

China Banking Regulatory Commission approval was still needed before any account could be set up in the zone, said Liu Ligang, chief China economist at ANZ Banking Group, who added that the key question now was how to control the flow of capital.

"It seems everyone could shift their capital there as the guideline lacks a clear definition on who can open accounts in the zone and who cannot," Liu said. "This is very dangerous. Such loose rules could cause huge hot money inflows into mainland China and make the domestic asset bubble even bigger."