Premier Li Keqiang has approved a milestone plan to allow foreign banks to directly set up wholly owned subsidiaries in Shanghai's new free-trade zone in a move designed to accelerate the opening of its financial services sector to global players, sources told the South China Morning Post.
Foreign banks will be permitted to set up shop directly in the free-trade zone in the Pudong New Area. They will also be allowed to establish joint-venture banks with mainland partners, either state-backed or from the private sector. The overseas partner can own the majority stake.
The move potentially cuts years from the time foreign banks must otherwise spend following a step-by-step regulatory roadmap before opening branches or subsidiaries on the mainland and is being seen as a sign of renewed effort to kick-start financial reform, the sources said.
"Li is keen to accelerate financial industry reforms. Allowing foreign banks to skip the previously required long approval process to directly set up business units in the free-trade zone shows his determination to bring in more competition to domestic banks," said one source, who declined to be identified because of the sensitivity of the information being disclosed.
The government would also encourage domestic private firms and foreign enterprises to set up financial services companies, such as accounting and rating agencies, in the zone, widely expected to be a testing ground for major policy reforms to free up cross-border commodity and capital flows, said another source.
Normally, a foreign bank needs to first set up a representative office, which will be used for communication and consulting purposes. It can apply to the China Banking Regulatory Commission to upgrade the office to a full-scale bank branch after two years, provided it has not breached any financial rules.
If the foreign bank wants to set up more branches, particularly to expand into new cities, or establish a wholly owned unit, it has to undergo a long approval process involving the banking regulator and relevant government bodies, such as the tax department.
Foreign banks including HSBC and Citigroup already have branches and wholly owned units on the mainland, but the short cut to set up units in the free-trade zone in Shanghai is expected to attract more international banks keen to secure a foothold in the world's second-largest economy.
The new rules and changes are part of Beijing's bid to create the mainland's first free-trade zone in Shanghai, the latest policy initiative to promote the city's ambitions as a global business hub and international financial centre.
"The biggest hurdle to Shanghai becoming a regional financial centre is to allow foreign banks to set up subsidiaries and enter the market freely," said a source with close ties to the State Information Centre, the think tank affiliated to the powerful National Development and Reform Commission.
"In allowing foreign banks to provide clearing services for financial transactions, this would also help further develop the international use of the yuan. It could be a major advantage for Shanghai, especially as there is still some insecurity in Beijing about Hong Kong being the major offshore yuan centre," the source added.
Of the about one trillion yuan (HK$1.26 trillion) in deposits outside the mainland, about 700 billion yuan is in Hong Kong, making it the world's most important yuan market.
Beijing has been actively encouraging offshore use of the yuan in a bid to break the dominance of the US dollar as the de facto currency of global trade given that China is now nominally the world's biggest exporter.
Getting more businesses to use the yuan for trade settlement increases China's influence in the global economy despite the strict controls on the country's capital account that prevent the yuan from being freely convertible.
On July 3, the State Council issued a statement after a meeting chaired by Li that the free-trade zone in Shanghai would be a snapshot of an "upgraded Chinese economy".
More details about Beijing's landmark plan for the trade zone would be released officially in the coming days, the sources said.