PBoC’s Financial Package In The Shanghai Free Trade Zone Deciphered

The author is ANZ Greater China chief economist Li-Gang Liu

The People’s Bank of China (PBoC) released the opinions of the financial package to support the developments of the Shanghai Free Trade Zone (FTZ) this morning.

The central bank said it would promote cross-border usage of the RMB, capital account openness, interest rate liberalization and foreign exchange management reforms in the FTZ.

We summarize the policies to be implemented in the FTZ as follows:

Management of the Free Trade Accounts:

· Residents in the FTZ will be allowed to open Free-Trade Accounts (FTA), which will allow both local and foreign currency transactions.

· Non-residents will be allowed to open Free-Trade Accounts for Non-residents (FTN), and enjoy financial services according to pre-establishment national treatment principles.

· Commercial banks in the FTZ will set up an FTA clearing unit which is separate from the onshore system to provide financial services to the organizations in the FTZ.

· The FTA and FTN can freely transfer between offshore accounts and onshore non-resident accounts, and money can be freely transferred between the FTA and FTN. Transactions under the capital account, such as loan repayment and FDI, will be allowed as well. The PBoC will allow full RMB convertibility when conditions are right.

Cross-border investments and transactions:

· Corporates will be allowed to directly invest overseas without the need for pre-approvals.

· Residents in the FTZ will be allowed to invest in the foreign securities market, and transfer the income raised in the FTZ to offshore accounts.

· Non-residents in the FTZ will be allowed to invest in the onshore financial markets including securities investment.

· Financial institutions and corporates in the FTZ will be allowed to invest in the securities and futures markets in Shanghai. The corporates in the FTZ will be allowed to issue RMB-denominated bonds in the onshore market.

· Corporates, non-banking financial institutions and other organizations registered in the FTZ will be allowed to borrow the offshore funds.

· Organizations in the FTZ will be allowed to engage in the offshore financial markets including the derivative markets to hedge the related risks. The FX positions derived in the FTZ should be squared within the FTZ and the offshore markets. A certain amount under FTA clearing unit could be allowed to enter into the onshore inter-bank markets.

RMB cross-border usage:

· Financial institutions in Shanghai could handle the cross-border RMB transactions related to current account and FDI transactions.

· Financial institutions in Shanghai could provide RMB clearing services to cross-border e-commerce business.

· Financial institutions and corporates in the FTZ can borrow RMB funds from the offshore markets, but these funds cannot be invested into securities, derivatives or be used for trust loans.

· Corporates in the FTZ can be allowed to start intra-group cash polling business.

Interest rate liberalization

· The PBoC will push forward interest rate liberalization in the FTZ gradually. The financial institutions in the FTZ will have priority to issue negotiable certificates of deposit (NCDs).

· When conditions are ripe, the ceiling of the deposit rate for small amount of foreign currency accounts will be removed.

FX management reforms

· The PBoC will simplify the FX transaction producers under FDI and strengthen the post-transaction supervision.

· The PBoC supports the development of the financial leasing business in the FTZ, and will simplify approval procedures regarding the financial leasing business.

· The PBoC will support the banks to start the FX business regarding OTC transaction facing the onshore clients.

(The article has been edited for clarity)

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