The Shanghai branch of the People’s Bank of China (PBoC) issued a document about RMB cross-border uses in Shanghai’s free trade zone on February 20th, providing some guidance for banks to conduct cross-border RMB businesses in the special trade zone.
"Overall, (it) resembles the opinion document issued by the PBoC headquarters in December," writes Liu Li-gang, chief economist of Greater China at ANZ in a report. "The PBoC remains very cautious and decides to liberalize the capital account items gradually in the free trade zone."
While enterprises can borrow RMB from the offshore market, the amount of funds is still capped by a macro prudential rule. In addition, the funds can only be placed in a special bank account for business purpose.
Commercial banks can only pay demand deposit interest rate for the RMB borrowed from the offshore market. These policies are very similar to current onshore foreign exchange regulation, and the "macro prudential policy coefficient" will be determined by the PBoC’s Shanghai branch, indicating that the authority retains the control against potential "hot money" inflows, according to the ANZ report.
Enterprises in the FTZ will be allowed to operate intra-group cross border RMB cash pooling on a bilateral basis. However, the funds in the cash pool should come from genuine business operation, and the cash flows generated from financing activities cannot be included into the cash pool.
On the positive side, specifying the role of China Foreign Exchange Trade System (CFETS) and Shanghai Gold Exchange reflects Shanghai’s plan to become a global RMB transaction, clearing and settlement center by 2015.
It reflects that the Shanghai FTZ will be a core element in the process of RMB internationalization.