People’s Bank of China

Shanghai FTZ to step up monitoring of capital flows to stabilise the yuan, PBOC says

PUBLISHED : Wednesday, 23 November, 2016, 2:14pm
UPDATED : Wednesday, 23 November, 2016, 10:19pm

Shanghai’s free-trade zone (FTZ) will step up its monitoring of cross-border capital flows, as part of efforts to stabilise the yuan’s exchange rate, the People’s Bank of China said on Wednesday.

Zhang Xin, head of the Chinese central bank’s Shanghai branch, told a government conference that the zone, the mainland’s first Hong Kong-style free market place, would aim to direct capital flows to result in a net inflow in 2016, in line with the central government’s goal of stabilising the financial markets.

“We will at least ensure a balance between the inflow and outflow of capital via the free-trade zone accounts,” he said, adding that FTZ-based financial institutions would be required to tighten oversight on money flows to crack down on money laundering, terrorism financing and tax evasion.

It was the first time that the banking authorities publicly set a goal for the balance of money flows through the FTZ, which was designed to be a testing ground for the full convertibility of the yuan.

When Shanghai officially launched the FTZ three year ago, it had hoped to transform it into a territory where freer cross-border capital and cargo flows would be allowed.

However, the yuan’s 3 per cent decline in value against the US dollar since the end of September had prompted Beijing to take actions to stabilise the currency’s exchange rate to prevent capital flight.

The Shanghai FTZ has yet to make the yuan fully convertible inside its 120 square kilometre area.

Zhang didn’t elaborate what steps the central bank could take to bolster inflows, but Zhou Hehua, vice president of Bank of China’s Shanghai branch, said that mainland lenders would offer preferential rates to buyers of the yuan to encourage them to hold more assets denominated in the Chinese currency in their FTZ banking accounts.

In a new document published to support further financial reforms in the FTZ, banking authorities will allow local technology firms based outside the zone to open special FTZ banking accounts to raise offshore funds to fund their expansions.

In addition to Shanghai, new FTZs have been established in Tianjin, Guangdong and Fujian.