Beijing's capital account reforms a win for Shanghai
Opening of the capital account in the city's free-trade zone and further interbank bond market shake ups to bolster debt market deals
Beijing threw open the capital account for companies and banks based in the Shanghai free-trade zone (FTZ) as a way to reinforce the city's bid to become a global financial centre while the country's official bond clearing house said it will expand a trial on centralised clearing for trading deals to the whole interbank bond market in a pair of significant steps to bolster debt market transactions and reduce trading costs.
The long-awaited liberalisation, 15 months after China launched its first FTZ, was aimed at reducing funding costs for mainland firms, giving foreign capital greater freedom in accessing the Chinese market and setting up the widespread opening of yuan's capital account, according to Zhang Xin, head of the central bank's Shanghai branch.
"The next half year will be a crucial period of time for financial reforms," he said. "Enshrined by the principle of developing Shanghai into an international financial centre, capital account liberalisation should be implemented gradually and entirely."
Zhang said further liberalisation would mark a milestone in the development of the Shanghai FTZ with more steps to be taken in the next six months to boost the city's role as an international financial hub.
Separately, China also took an important step towards creating an international bond market yesterday as the Shanghai Clearing House would expand a trial on centralised clearing for trading deals to the whole interbank bond market.
Under the central party clearing model, deals are cleared by a netting method which handle the transactions under a single and centralised system.
"It is a sign that the government will push the development of the bond market in line with the efforts to internationalise the yuan," said Gu Weiyong, chief executive of Ucon Investments. "An internationalised currency can't be established without a mature and huge bond market that attracts global funds."
On the capital account, this gives companies based in the FTZ the freedom to raise offshore yuan or foreign currency outside the mainland. They can borrow maximum funds equivalent to two times their registered capital without going through any regulatory approval procedures.
Zhang added that local residents would be soon allowed to deposit funds in bank accounts in the FTZ for purchases of equities and properties abroad, but he did not elaborate on the investment cap for individuals.
The new liberalisation would also apply to an expanded Shanghai FTZ endorsed by the State Council at the end of last year.
A Pudong government official said the whole eastern bank of the Huangpu River would be developed into a Hong Kong-style free port.
"The new policies are more than a liberalisation," said Cao Hua, an executive with Tripod Capital.
"It not only eases the cross-border capital flows for companies based in the zone, but also heightens hopes for an entirely free conversion between yuan and foreign currencies across a much larger area."
