The China (Shanghai) Pilot Free Trade Zone (the "FTZ") was launched in September 2013 with the promise of significant reforms in a number of areas. For the foreign investor community, the change from an approval-based to a registration-based system for the establishment of subsidiaries in the FTZ (in those areas not on the so-called 'Negative List' 1 ) and the promise of opening up a number of new sectors to foreign investment in the FTZ raised a significant level of interest. However, it was the prospect of financial and foreign exchange reforms and of experiments with liberalisation of the RMB on the capital account that generated perhaps the most excitement among commentators. The Master Plan for the China (Shanghai) Pilot Free Trade Zone (the "Master Plan"), issued by the State Council at the time of the FTZ launch, was the blueprint for the FTZ's development. The goals for financial reform set out in the Master Plan were to further open up investment, promote the transformation of trade development, and deepen the liberalization and innovation of the financial sector. As we noted in our first note on the FTZ (to read that, please click here), China's financial and foreign exchange regulators - China's central bank, the People's Bank of China ("PBOC"), the State Administration of Foreign Exchange ("SAFE"), and the banking, insurance and securities regulators - agreed to provide substantive rules and guidelines on how the Master Plan's broad statements of principle will be implemented in the FTZ. 1 China (Shanghai) Free Trade Zone Special Administrative Measures for Market Access of Foreign Investment (Negative List), issued by the Shanghai People's Municipal Government on 29 September 2013 lists industry areas in which foreign investment in the FTZ will be restricted or prohibited. A new reportedly 'slimmed down' version was scheduled to be issued shortly at time of writing. On 2 December 2013, the PBOC issued Opinions on Financial Support for Building the China (Shanghai) Pilot Free Zone (the "Opinions"). The Opinions are more a set of principles than detailed implementing rules, and it was clear that more legislation would need to follow. However, they indicate the direction the financial reforms in the FTZ are likely to take. The Opinions have been followed by some more detailed rules: Implementing Opinions of the Shanghai Head Office of PBOC on the Provision of Crossborder RMB Payment Services by Payment Institutions in the Shanghai Municipality (the "Payments Opinions") on 18 February 2014; Circular Supporting the Expansion of Crossborder Use of Renminbi in the Shanghai Pilot Free Trade Zone (the "RMB Circular") on 20 February 2014; Circular on Effecting Anti-money Laundering and Anti-terrorism Financing in the Shanghai Pilot Free Trade Zone (the "AML Circular") on 27 February 2014; Detailed Rules Supporting Foreign Exchange Management in the Shanghai Pilot Free Trade Zone (the "Forex Management Circular") on 28 February 2014; and Circular of the Shanghai Head Office of PBOC Lifting the Caps on Interest Rates on Smallamount Foreign Currency Deposits within the China (Shanghai) Pilot Free Trade Zone (the "Interest Rates Circular") on 1 March 2014, (collectively, the "Circulars"). In addition, on 25 March 2014, the Shanghai Municipality Financial Services Office issued a set of examples showing that some of the new measures2 Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 have already been put into effect in the FTZ (the "SFO Cases"). Mr Jian Danian, Deputy Director General of the FTZ, speaking at a recent event in Shanghai, emphasised that the aim of the financial reforms is not to turn the FTZ into a financial centre. Rather, the reforms are aimed at supporting trade and investment enterprises in the FTZ ("FTZ Enterprises"). This is reflected in the Opinions and the Circulars, which set out some of the facilities and tools that will be newly available to enterprises in the FTZ. Each of the Circulars builds on a section of the Opinions. In this note we examine the Opinions and how the Circulars expand on and support the Opinions. We also consider the extent to which these new rules allow greater freedom for foreign investors in the FTZ than elsewhere in China. New Accounts for the FTZ The Opinions provide that Chinese and foreign companies and individuals working in the FTZ will be able to establish "free trade accounts" ("FTAs") in the FTZ. FTAs may be RMB or foreign currency accounts. FTAs will be treated similarly to bank accounts outside China and will have the following key features: The movement of funds between FTAs, and between FTAs, offshore accounts and nonresident bank accounts in China (but outside the FTZ), will not be subject to the existing restrictions on the movement of funds between China and overseas accounts. ("Non-resident bank accounts" here means bank accounts opened in China by overseas entities and individuals.) An entity or individual will be able to transfer funds between its FTA and its (own) bank accounts elsewhere in China for the purposes of current account transactions, loan repayments, investments and other qualified cross-border transactions. Fund transfers between FTAs and other onshore accounts outside the FTZ will be regulated as if they were cross-border transactions. Cross-border financing, security and other business will be permitted, and "when conditions are ripe", RMB and foreign currencies within FTAs will become freely convertible. A mechanism for monitoring RMB exchange under FTAs will be set up – presumably to help SAFE/PBOC to assess when conditions will be ripe. Financial institutions in Shanghai will be able to create separate accounting units to open FTAs for entities within the FTZ. Outside the FTZ, individuals may transfer no more than a total of USD50,000 into or out of China each year on the strength of simply showing the bank an identification document; beyond this limit, they must show documentary evidence that the payment is for the purposes of a lawful and genuine transaction in order for the bank to be able to make the appropriate conversion of RMB into foreign exchange ("forex") (or vice versa). For corporate entities there is no automatic quota. In order to transfer funds for transactions classified as current account items cross-border, companies are generally required to provide evidence to the remitting or receiving bank in China of a genuine lawful underlying transaction. Cross-border transfers of capital account items, until recently, required SAFE approval, though, in relation to foreign direct investment-related transfers, that approval requirement has generally been relaxed so that (depending on the type of transaction in question) either banks are permitted to process transactions directly based on data held in the SAFE system, or registration rather than approval is required (to read more details, please click our client note on SAFE Circular 59). At time of writing the PBOC had yet to issue regulations to guide banks on how to operate and administer FTAs. Currency Exchange for Investment and Financing The management of the financial and forex elements in relation to foreign investment projects will be simpler in the FTZ than elsewhere in China, and FTZ Enterprises and individuals in the FTZ will be permitted to make cross-border investments that are not feasible outside the FTZ (or which are available through only limited channels or subject to onerous approval requirements). No SAFE registration is required for forex for foreign direct investment: Forex registration for foreign direct investments in the FTZ, traditionally controlled by SAFE, will be conducted by commercial banks in the FTZ.Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 3 This is different from the position outside the FTZ. Over the last year, SAFE has relaxed its requirements for the movement of capital account items foreign direct investment in China generally – so that such transfers are now subject to (pre-)registration requirements rather than SAFE approval. In the FTZ, even the registration requirement will be removed. PRC individuals permitted to buy foreign securities: Qualified individuals who work in the FTZ will be permitted greater individual investment opportunities. Chinese nationals working in the FTZ will be able to buy foreign securities and derivatives, which are currently available to them largely only through the Qualified Domestic Institutional Investor ("QDII") scheme. That scheme allows them to invest through qualified Chinese institutions that are given a quota within which to invest outside China in equities and fixed income products and which therefore offers only limited scope for offshore investment. Reports suggest that demand for QDII funds has been low, partly because of their performance during the 2008 financial crisis and beyond. Foreign individuals permitted to buy Chinese securities: Foreign nationals working in the FTZ will be permitted to invest in China's domestic markets, including in "A shares" on China's securities markets, through FTAs. This is a significant development because foreign nationals are currently generally limited to purchasing Chinese B shares (shares in companies based in China that are traded in forex on the Shanghai or Shenzhen stock exchanges and are eligible for foreign investment) or investing in China through the Qualified Foreign Institutional Investor scheme, which is more oriented towards institutional money. Capital market liberalisation: The Opinions provide that financial institutions and enterprises in the FTZ will be permitted to invest in the securities and futures markets in the Shanghai area, and that offshore parent companies of enterprises in the FTZ will be able to issue RMB bonds in China's domestic capital market (so called "panda bonds"). Outside the FTZ, China has permitted the International Finance Corporation and the Asian Development Bank to issue panda bonds since 2005 but since then, development of panda bonds has been slow: no new panda bond has been issued since the Asian Development Bank issued its second in December 2009. External financing: FTZ Enterprises will be permitted to raise RMB and forex funds from overseas "pursuant to relevant provisions" and provided that they must "improve the macroprudent management system for external debts" and put in place effective risk management measures. Diversified risk hedging instruments: FTZ Enterprises will also be able to hedge risks within the FTZ or in overseas markets. The Opinions state that diversified risk-hedging instruments will be made available, and that institutions within the FTZ will, "pursuant to relevant provisions", be able to carry out risk hedging within the FTZ or on overseas markets based on real currency matching and maturity matching management needs (i.e. not for speculative purposes). Cross-border Use of the RMB Cross-border RMB settlement for current account items and direct investment: Banks in Shanghai will be permitted to carry out crossborder RMB current account and direct investment transactions in accordance with instructions from individuals and enterprises in the FTZ (other than enterprises subject to special supervision for RMB settlement of export trade in goods). RMB settlement for cross-border eCommerce: Banking institutions in the Shanghai municipality but outside of the FTZ will be able to provide RMB payment/receipt services for cross-border e-commerce transactions - working with qualified institutions within the FTZ. RMB borrowing from overseas: The Opinions state that, "under relevant provisions" (not explained in the Opinions), both domestic- and foreign-invested enterprises registered in the4 Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 FTZ will be able to obtain RMB loans from overseas and to provide security and loans to overseas parties. RMB loan funds must not be used to purchase negotiable securities, derivatives or for making entrusted loans. According to the SFO Cases, the Bank of Construction, Bank of Communications and China Merchants Bank have already helped a number of enterprises and non-financial institutions in the FTZ to borrow RMB funds from overseas on the basis of this new policy. Cash pooling and centralised collection and payment services: FTZ Enterprises will be permitted to carry out two-way RMB cash pooling to provide centralised collection and payment services for cross-border RMB current account items among its domestic and overseas affiliated enterprises. Cash pooling will allow group companies to concentrate their liquidity in a single bank account by, for example, having group companies regularly transfer their surplus funds to a master account held by their entity in the FTZ and transferring cash from that master account to those group companies whose accounts have a debit – thus balancing out the group companies' cash needs. It has a number of potential advantages, including allowing more efficient use of cash and optimising interest on bank accounts. Outside the FTZ, cash pooling is permitted only within an entrusted loan framework 2 . The RMB Circular expands on (and, in some cases, repeats) these points and imposes requirements on banks in relation to the cross-border use of the RMB. In particular: Cross-border direct investment transactions: When carrying out direct investment transactions in areas falling within the Negative List, banks must require the transacting party to show evidence that the investment has been approved by the appropriate government 2 Chinese companies are generally not permitted to loan funds directly and may do so only by way of "entrusted loans" made through banks as between entities in China. SAFE Circular on Centralised Management of Foreign Exchange Funds by Core Members of Domestic Enterprise Groups  No.49 (the "Cash Pooling Circular") permits domestic group companies to carry out forex cash pooling by way of entrusted loans. authorities. They may carry out other direct investment transactions simply based on the instructions of entities and individuals within the FTZ. RMB borrowing capacity: The RMB Circular provides formulae for calculating the amount of RMB debt that that enterprises established in the FTZ will be able to assume. Enterprises will be able to borrow a maximum RMB sum calculated by multiplying, depending on the type of entity in question, 1x or 1.5x their paidup capital x a macro-prudential policy parameter (coefficient) determined by the PBOC. Under existing rules, foreign-invested enterprises ("FIEs") may borrow no more than the difference between their registered capital and total investment amount (both of which figures are subject to approval from the Ministry of Commerce ("MOFCOM") in any FIE set up in China). The ratio of the two is subject to statutory debt to equity ratios. The RMB Circular provides that FIEs in the FTZ may choose whether to comply with the existing limitations on their debt: MOFOCM debt to equity ratios or the formulae provided in the RMB Circular, though once that election has been made it may not be changed. The RMB Circular does not make clear how or whether this affects FIEs' entitlement to borrow foreign currency funds and whether forex borrowing by FIEs in the FTZ will continue to be restricted to the difference between registered capital and total investment 3 . 1.5 x registered capital (which only applies to financial institutions) equates to a ratio of 60% debt to 40% equity, which is lower than the current ratios applicable where total investment is US$30m or above (66% debt : 33% equity), so this will only provide greater borrowing capacity to FIEs than under current rules at 3 There has long been a debate about whether the debt: equity restriction on FIEs applies only to forex borrowings which constitute foreign debts or both forex and RMB. We take the view that it applies to both. That view is at least the partially supported by the People's Bank of China Circular on Clarifying the Detailed Operating Rules for RMB Conversion Business in relation to Foreign Direct Investment issued by the PBOC with effect from 14 June 2012.Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 5 lower capitalisations or where the coefficient imposed by the authorities is greater than 1. The RMB Circular requires that the term of each RMB loan must be not less than one year and, importantly, borrowed funds must be used only for operations or establishing projects in the FTZ or for establishing projects outside China. Cash pooling: The RMB Circular explains that, for the purposes of cash-pooling, group companies means entities that are connected by investment-type relationships (parent/subsidiary/and so forth) one of which must be established in the FTZ ("Group Companies"); and that two-way cross-border RMB cash pooling means two way cash sweeping among on-shore and off-shore group members for the purposes of financing international operations. The RMB Circular provides that cash-pooling must be carried out through a discrete RMB account opened by the Group Company that is established in the FTZ, and, for the time being, must be used to facilitate international operational activities among Group Companies only – it must not be used for pooling cash-flow generated by financing activities (loans). The Group Companies and their banks must enter into an agreement on the terms of the cashpooling arrangement which must set out the parties' agreed anti-money laundering, antiterrorism and anti-tax avoidance obligations. According to the SFO Cases, Shanghai Pudong Development Bank has already started to offer cross-border RMB two-way cash pooling services, including to five Max-Vision Electronics group companies, and Shanghai branches of the Industrial and Commercial Bank of China have begun providing centralised forex fund management services to multinational companies, including the Jinjiang Group. Centralised cross-border payment and collection services: This will be permitted among Group Companies and entities with which Group Companies have supply chain or close trading relationships ("Participants"). The Group Company in the FTZ must open a discrete account through which to channel such payments and collections. Similar to cashpooling arrangements, the Participants and the relevant bank must enter into an agreement on the terms of their arrangement and setting out the parties' anti-money laundering, antiterrorism and anti-tax avoidance obligations. Payments and collections must be based on genuine underlying transactions. As far as we are aware, this is the first time that such structures have been permitted in China. This sort of arrangement has not been possible on a cross-border basis before because SAFE will generally allow cross-border payments to be effected only based on a clearly documented underlying transaction between counterparties. RMB settlement for cross-border eCommerce: The Circular provides that banks may provide cross-border RMB transaction services to e-commerce operators in the FTZ provided that payments/receipts are based on genuine e-commerce transactions. Currently, Chinese consumers have limited channels for making purchases from offshore via the internet. It is of course possible to purchase through platforms such as taobao.com, and many people do, but some Chinese are wary of doing so, perhaps partly because they believe that some products sold by vendors through that platform are counterfeit or the vendor is not sufficiently reliable. Outside the FTZ, crossborder e-commerce payment in forex has been permitted on a pilot basis since early 2013 under SAFE's Guiding Opinions on Pilot Crossborder E-commerce Foreign Exchange Payment by Payment Institutions 4 . Under that pilot scheme, PBOC has reportedly granted 17 payment licences to companies in five regions across China. In December 2013, a pilot crossborder e-commerce platform, kuajiangtong.com, was launched in the FTZ. The Payments Circular provides that payment institutions that are registered in Shanghai and hold an internet payment licence may carry out cross-border payment services provided that 4  No 5, effective 2 January 2013.6 Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 they satisfy certain conditions. Those conditions are that the institution must have the infrastructure to support cross-border RMB payment services, including sound internal control and risk management system, appropriate technology, anti-money laundering, anti-terrorism financing and anti-tax evasion systems and it must have a clean compliance record. Cross-border RMB payments made over the internet must be two-way payments based on real transactions; payment by way of netting is not permitted. Payments must be for goods or services and must not be for capital account items. According to the SFO Cases, ChinaPay and 99Bill have already begun working with banks to provide cross-border e-commerce RMB payment settlement business in the FTZ. Interest Rates China's recent moves towards relaxing controls on interest rates will be expanded in the FTZ: Market-based interest rates…at some point: The Opinions provide that efforts will be made to create a system within the FTZ for marketbased interest rates – based on the underlying conditions being ripe for doing so. Mechanisms for monitoring market-oriented pricing are to be developed. Negotiable Certificates of Deposit: Financial institutions in the FTZ that meet certain requirements will be among those entities granted priority for issuing Negotiable Certificates of Deposit ("NCDs") – for which banks may independently set return rates. This will expand the pilot programme, under which, in late 2013, PBOC selected ten banks (all at headquarters level) to issue NCDs in the interbank market. Upper limits to be relaxed…at some point: The upper limit on interest rates on smallamount deposits in foreign currencies under ordinary accounts in the FTZ will be relaxed "when the time is right". PBOC abolished the lower limit on bank lending interest rates in China generally in July 2013. The Interest Rates Circular suggests that the time is already right for lifting the caps on interest rates on small amount forex deposits 5 in the FTZ. It provides that these caps would be lifted with effect from 1 March 2014. Financial institutions in Shanghai may now independently set interest rates on forex deposits held by domestic capital entities and FIEs established in the FTZ and Chinese individuals who have been working in the FTZ for at least one year. Financial institutions are required to make efforts to develop their ability to set interest rates based on supply and demand and to design appropriate pricing strategies and models. They must implement proper risk management and monitor (and be able to predict) the impact of interest rate fluctuations on financial markets and currency flow. The SFO Cases tell us that on March 1 the Bank of China issued a certificate of deposit bearing the wording "negotiable interest rate" to an individual working in the FTZ, and that a number of other banks have also started to offer this service. Reform of Foreign Exchange Administration Regional headquarter and new trade models: According to the Opinions, the development of a "headquarters economy" and new trade models will be supported in the FTZ. In order to facilitate trade and investment, the scope of enterprises allowed under existing pilot programmes for centralising forex management by headquarters of multinationals will be expanded, the management of forex fund pools will be simplified and the pilot programme for forex administration by international trade settlement centres, announced by SAFE in 2010 6 , will be extended. 5 For these purposes, PBOC defines "a large amount forex" as "more than USD 3 million (inclusive) or the equivalent value in other foreign currencies" and "a small amount" as "below USD 3 million (or the equivalent value in other foreign currencies)", see Circular of the People’s Bank of China Regarding the Reform of the Systems for the Administration of Foreign Currency Deposit and Loan Interest Rates, 24 August 2000. 6 Under Reply Concerning Certain Enterprises in the Shanghai Free Trade Zone to Operate as International Trade Settlement Centres Foreign Exchange Administration Pilot issued by SAFE on 30 September 2010.Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 7 Generally no approval required for outbound investment by FTZ enterprises: Domestic capital companies and Chinese individuals outside the FTZ who wish to make outbound investments must generally register with SAFE (as well as obtaining approvals or meeting other regulatory requirements imposed by the National Development and Reform Commission and (possibly) MOFCOM). The Opinions state that such investment by FTZ Enterprises will be able to deal direct with their banks to effect cross-border collection and payment and associated currency exchange for cross-border investment purposes. According to the SFO Cases, these changes have already allowed equity investment enterprises, such as Hony Capital (弘毅投资公 司), to invest in off-shore equity investment projects much more quickly than would previously have been possible. Streamlining foreign exchange registration procedures for direct investment: The Opinions provide that the banks will be able to carry out forex registration for direct investment into the FTZ. Outside the FTZ, SAFE has relaxed its requirements in respect of foreign direct investments in China using forex over the last year from pre-approval to registration. Development of leasing: In the FTZ, crossborder leasing and other offshore credit business activities, currently subject to approval requirements outside the FTZ, will be subject to registration requirements instead. Approved financial leasing companies will be permitted to collect rent in forex even for domestic leasing services. Procedures for prepayments for leasing aircraft, ships and other large financial leasing projects will be simplified. Performance of security to offshore parties: Over the last year, SAFE has relaxed some of its requirements in relation to foreign direct investments in China from approval to registration for certain capital account items. The Opinions provide that free movement of forex for direct investments in the FTZ will be permitted and responsibility for registering the transfer and conversion of forex for these purposes will be delegated to banks. The Opinions provide that FTZ Enterprises may grant security to offshore parties for loans provided by offshore parties and may purchase forex for payment when performing such security direct from their banks - without SAFE approval. Outside the FTZ, the current position is that the provision of security by onshore parties to offshore parties is subject to SAFE approval; further SAFE approval is required before a payment under cross-border security may be remitted offshore – though SAFE is currently carrying out consultations on a draft rule that would dramatically relax these requirements. Support for over-the-counter bulk commodity derivatives: The Opinions note the importance of improving the management of forex sales and transactions and of supporting banks' provision of over-the-counter bulk commodity derivatives transaction services for domestic clients. The Forex Management Circular builds on these points. It is addressed to designated foreign exchange banks in Shanghai. Regional headquarters: FTZ Enterprises "who meet relevant conditions" will be able to open and carry out centralised payments and netting through their RMB/Forex capital accounts. These accounts may also be used for carrying out international trade settlement and centralised management of the capital, debt, and liquidation of assets of Group Companies. Direct investment: Banks (rather than SAFE) will be responsible for registration of forex capital account items for direct investments in the FTZ. FIEs in the FTZ will be able to transfer forex capital items freely. They should open a RMB account that corresponds to their forex capital account and may deposit RMB generated from their forex capital into that RMB account and make payments freely from that RMB account – based on the principle that payments must be based on genuine underlying transactions. The Forex Management Circular makes it clear that FIEs must not use RMB generated from their capital for purposes that fall outside their registered8 Financial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 business scope, for the direct or indirect investment in securities, for making entrusted loans or repaying their own or third party debts, or for investing in real estate other than for their own use 7 . Leasing: The Forex Management Circular provides no more detail than the Opinions in this area. It simply repeats that financial leasing transactions carried out by financial leasing companies in the FTZ will be subject to registration requirements rather than approval requirements. The SFO cases tell us that a Bank of Communications financial leasing company has already obtained approval to launch aeroplane- and ship-leasing activities in the FTZ and to establish a subsidiary in the FTZ. Loans and offshore security: The maximum aggregate amount which an enterprise in the FTZ will be permitted to use to make loans offshore is increased from a sum equivalent to 30% of the value of equity interests held in it to 50%. This limitation may be relaxed with approval from SAFE. Restrictions in relation to the net asset ratio and the profitability of security provides and secured parties will not apply to FTZ Enterprises providing offshore security. The Forex Management Circular confirms that no approval will be required for FTZ Enterprises to provide security to offshore parties or to perform such security. It states that offshore security should nevertheless comply with existing rules (for example, that secured borrowed funds must not be used to buy equity (except by an investment company), and those restricting the amount of debt that an entity may assume, and that banks must verify such compliance. Commodity trading: The Forex Management Circular imposes certain requirements on banks carrying out commodity trading services for FTZ Enterprises. These include requirements to check that entities carrying out this sort of trading have the appropriate background for 7 This restriction does not apply to registered foreign-invested real estate investment companies. This is basically a repetition of the provisions of SAFE Circular No 142 of 2008. doing so, comply with appropriate hedging principles and to advise those entities about information disclosure and risks. Banks are also required to report bulk commodities trading figures to SAFE. According to the SFO Cases, Shanghai branches of the Bank of China and other financial institutions have already provided enterprises in the FTZ with forex services for bulk commodity derivatives. Anti-Money Laundering and Anti-Terrorist Financing Measures The AML Circular is addressed to finance-related companies and banks. It requires them to put in place measures to prevent money laundering and terrorist financing. These include knowing their clients and reporting suspicious transactions to the China AntiMoney Laundering Monitoring & Analysis Centre. Equivalent rules applicable outside the FTZ impose more onerous reporting requirements. Those require, for example, any bank transfer (or aggregated transfers within one day) between two legal persons that exceeds RMB2 million must be reported to the China Anti-Money Laundering Monitoring & Analysis Centre. The AML Circular requires finance-related companies and banks to make their own risk assessment of their clients by considering factors such as where the client comes from (for example, a jurisdiction with relatively weak anti-money laundering/anti-terrorist financing system), the type of enterprise, its business and the industry within which it operates. With approval from its internal supervision department, a bank/finance company may refuse to do business with clients whom they consider to be high risk, including those who refuse to provide required information, those who give rise to a reasonable suspicion of money laundering or terrorist financing activities, and those who originate from jurisdictions with weak anti-money laundering/antiterrorism financing systems. Banks and financing companies must carry out checks on entities and individuals wishing to make cross-border transactions of more than RMB two million and RMB 200,000 respectively; parties to transactions where one or both parties are listed as (or have similar names to persons/entities listed as) suspected criminals, or of money laundering or terrorist financing; have been party to previously reported suspicious transactions; or where the transaction is connected with a jurisdiction that hasFinancial Reforms for the Shanghai (Pilot) Free Trade Zone: slowly coming into focus April 2014 9 a weak anti-money laundering/anti-terrorism financing system. Conclusion Despite the examples given in the SFO Cases, anecdotal evidence suggests that, so far, few companies in the FTZ have, as yet, begun to take advantage of the new financial policies. Several hundred companies have already established a presence in the FTZ, but most seem to be taking a "wait and see" approach to these reforms: waiting for more detailed regulations and seeing whether, and how successfully, others are able to benefit from the reforms. On the face of the documents issued to date, one of the more interesting changes for foreign investors is the development of cash pooling. This should be a positive development for multinationals with multiple subsidiaries in China. The greater flexibility in terms of choosing how to calculate borrowing capacity appears to be a positive development for foreign investors, although they would no doubt prefer to see the restrictions lifted entirely: restrictions on FIEs' borrowing currently puts them at a disadvantage when compared with domestic entities whose borrowing is not limited in the same way. China took the lessons of the Asia and global financial crise very much to heart, and remains wary of liberalising its currency on the capital account for fear of inflows of 'hot money' and allowing speculation on the RMB. However, the financial reforms for the FTZ are clearly a further step on the road to internationalisation and ultimately full liberalisation of the RMB. While the reforms are ostensibly to be implemented on a pilot basis, given international pressure on China to internationalise and liberalise its currency on the capital account, it seems unlikely that it will turn back on that road. It is only a step, however, and, although the documents that have been issued thus far give an idea of the form that the reforms will take, details remain sketchy. This tends to be the way of reforms in China, where government authorities prefer to take a step-bystep approach to reform and to issue initial regulations that are rather general, followed by more detailed when legislative details have been worked out. Implementing reform on a pilot basis and by way of a series of increasingly detailed sets of rules allows China to ringfence the changes in a limited area and to adjust the direction of those changes based on market reaction to them and any negative consequences observed in the trial zone. Given the clear policy direction in favour of currency liberalisation, perhaps the key attractions for multinationals of the whole FTZ 'package' are the availability of cash management tools (however embryonic), such as cross-border cash pooling that are simply not available elsewhere in China, and the opportunity to be among the first to take advantage of new developments and policies as and when they materialise.