Key Points

  • Successful reforms in the zone will be introduced to other parts of China.
  • Regulators in China are committed to the development of a wide-scale financial reform in the area.
  • A number of reforms will cover banking, insurance and capital markets sectors.

Background

The China (Shanghai) Pilot Free Trade Zone (“PFTZ”) was officially declared open on September 29, 2013. The PFTZ is said to be one of the boldest economic efforts in China in recent years. The government has indicated that the successful reforms in the PFTZ will be introduced to other parts of China, with initial pilot period running for three years.

Highlights of the Key Changes to the Banking, Insurance and Capital Market Sectors

In support of the strategic reforms, various central regulators have set forth key areas of focus in contemplating the changes to their industry. Below are a selection of key changes to the banking, insurance and capital market sectors.

The aim of the circular issued by the China Banking Regulatory Commission is to strengthen support for banking institutions in the PFTZ, focusing on the following key areas:

  • Chinese-funded national commercial banks, policy banks and banks in Shanghai are encouraged to establish new branches or special institutions in the area and existing outlets may be upgraded without any restrictions in numbers.
  • Qualified large groups incorporated in the PFTZ are encouraged to establish group finance companies, with qualified investors encouraged to set up auto finance companies and consumer finance companies.
  • Trust companies in Shanghai are encouraged to relocate.
  • National financial asset management companies are encouraged to establish branches in the PFTZ with finance leasing companies encouraged to established specialized subsidiaries.
  • Qualified foreign-invested banks are allowed to set up subsidiaries, branches, special institutions and Sino-foreign equity joint venture banks in the zone.
  • Foreign-invested bank sub-branches are allowed to upgrade to branches and the statutory period for a representative office of foreign to be upgraded to a branch and for foreign bank branches to be allowed to carry out RMB business may be shortened.
  • Qualified private investors are encouraged to set up banks, finance leading companies, consumer finance companies and other finance institutions and participate in setting up Sino-foreign equity joint-venture banks with other Chinese or foreign financial institution investors.
  • Banking financial institutions in the PFTZ are encouraged to carry out cross-border financing business including, but not limited to, commodity trading finance, whole supply chain finance, offshore vessel finance, financial support for modern service sectors, onshore loans with offshore guarantees and commercial instruments.
  • Banking financial institutions in the PFTZ are encouraged to promote finance services for cross-border investments including, but not limited to, cross-border M&A loans and project loans, guarantee for offshore loans, cross-border assets management and wealth management business and real estate investment trust.
  • Qualified Chinese banks are allowed to engage in offshore banking business in the PFTZ.

The administration process on market access will be simplified with a reporting requirement, instead of the prior approval process, for establishment of sub-branches and outlets, senior management personnel and conduct of certain businesses will be required. The supervision and government service system will be improved such that a relatively independent supervision and monitoring system for banking institutions, such as for adjustment of deposit-to-loan ratio, liquidity ratio and other indicators, will be established.

The China Insurance Regulatory Commission has put forward eight key areas in which it will promote the development of the insurance business in the PFTZ:

  • The establishment of foreign-invested specialized health insurance institutions.
  • Insurance companies setting up branches in the PFTZ, developing cross-border RMB-denominated reinsurance business in the zone and researching on catastrophe insurance system.
  • Outboard investment pilot in the PFTZ and the expansion of the scope and ratio of outbound investments.
  • Commencement of business and provision of services by world-renowned insurance intermediaries as well as social organizations or individuals engaged in reinsurance business.
  • Development of shipping insurance business.
  • Expanding insurance products and service scope of liability insurance business.
  • Improvement of the insurance system in Shanghai and promoting the establishment of shipping insurance pricing center, reinsurance center and insurance fund management center.
  • Supporting the mechanism linking financial reform and innovation with Shanghai and strengthening cooperation between the China Insurance Regulatory Commission and the Shanghai Municipal Government.

The policies and measures issued by the China Securities Regulatory Commission (“CSRC”) in support of the financial services section in the PFTZ are as follows:

  • The Shanghai Futures Exchange will be allowed to establish an international energy trading company in the area, which will be responsible for enhancing the establishment of a trading platform of international crude oil futures.
  • Financial institutions and enterprises may make two-way investments in the domestic and overseas markets.
  • The issuance of RMB bonds by overseas parents of enterprises in the PFTZ will be encouraged and, depending on market needs, the CSRC may introduce the trading of international financial assets.
  • Over-the-counter transactions of commodities and financial derivatives for domestic clients carried out by securities and futures institutions in the PFTZ will be supported by CSRC.

Conclusion

As evidenced by the above policies and measures put forward, it is clear that regulators in China are committed to the development of a wide-scale financial reform in the PFTZ. While the PFTZ is the testing ground for new policies, it will remain to be seen how far China will be willing to reform its capital markets. It is expected that foreign investment programs and outbound investment private equity funds will take place in the PFTZ during the initial phase. While we will remain on the lookout for implementation of rules to regulate the financial innovations set out in the General Plan, it is clear that China has committed to economic reform with an aim to gain a competitive edge in the global financial market.