Free trade zones - China's stepping stones to financial liberalisation
Carmen Ling says expanding the scheme and other policy shifts pave way to yuan convertibility
China is stepping on the reform accelerator, opening its capital account much faster than expected. Just one year after opening its first free trade zone in Shanghai, China is now liberalising offshore borrowing for firms registered there. The Shanghai free trade zone was originally billed as a three-year trial, but China is forging ahead, expanding Shanghai and launching three new zones on March 1.
While not the sole conduit for reform, the trade zone scheme is crucial to the prospects of a fully convertible renminbi, and the speed at which China is expanding the scheme is surprising many observers.
Even more policy relaxations could be on the horizon in the run-up to the International Monetary Fund's review of its special drawing rights later this year. The review, taking place every five years, will decide whether the renminbi gets included in the rights alongside the dollar, euro, pound and yen. If it does, this will be a major boost for renminbi internationalisation.
The announcement on February 12 that offshore borrowing for firms in the Shanghai free trade zone will be relaxed further - and that the new regulation will include banks - is a significant breakthrough.
The latest policy changes follow Beijing's announcement in December that it would expand the Shanghai free trade zone, by including sites such as the Lujiazui financial district, and establish three new hubs in Tianjin , Fujian and Guangdong.
The Shanghai trade zone has been an important test bed for freer trade and a more liberal business and financial environment. The fact that China is now expanding the zone and replicating it in other cities confirms that the government considers it a success.