We report on a number of developments intended to open up China’s financial markets.
I. Background of Shanghai Free Trade Zone
The China (Shanghai) Pilot Free Trade Zone (“FTZ”) was launched on 29 September 2013. It is a testing ground for reforms in China and also acts as a “sample model” for other provinces/cities.
FTZ is the first free-trade zone in mainland China, integrating four existing bonded zones in the district of Pudong: Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone. Nine months after the launch of the zone, 10,445 enterprises were registered in the zone; 12% of these being foreign companies. This result is encouraging when compared to a sum of only around 8000 registered enterprises in 20 years for the FTZ’s predecessor, the Shanghai Composite Bonded area.
Now a range of financial laws/regulations have been implemented, including liberalization of deposit interest rates and free trade accounts.
II. Liberalization of deposit interest rates
In February, People’s Bank of China (“PBoC”) announced that the deposit interest rate ceilings on smaller foreign currency deposits below USD 3 million were to be removed as of 1 March 2014.
This move will primarily benefit smaller accounts of foreign currencies in FTZ because, as of 2000, China had already liberalized lending rates and deposit rates on accounts holding more than USD 3 million. This latest move was seen as “a significant step towards implementing a complete, market-based system for setting interest rates”.
The rule applies to bank accounts opened by companies and organizations registered in the free trade zone and individuals working there for longer than a year, the Shanghai headquarters of the People’s Bank of China said in a statement. On 27 June 2014, the rule was extended across Shanghai. PBoC’s Shanghai Head Office stated on 24 July 2014 that one month after the reform, the PVT of the foreign currency market had been steady and no cross-border arbitrage had been found. It is widely believed that the liberalization reform will eventually be extended across the whole country if it is successful.
III. Free trade account policy
The Shanghai Head Office of PBoC said five banks have met the requirements to open free trade accounts. The new accounting system covers all the traditional banking services like deposits, loans, remittance, L/C and letter of guarantee services, but under different mechanisms than those used in the non-FTZ onshore market: “It’s as much as creating a new market.”
Companies now have easier access to foreign loans. Loan interest rate in FTZ is generally lower than that of the outside-FTZ onshore market. What might excite companies more is that business loans borrowed inside FTZ can be used to pay off business loans borrowed from outside of the FTZ as long as they are borrowed through accounts under the same name.
In addition, non-resident enterprises that previously did not have access to certain services can now enjoy these services through a free trade account. Previously, only a few banks in China could conduct offshore business through their licenses, but this will change following a recent statement of PBoC confirming that at least all local banks in Shanghai will be able to run free trade account business and provide related services to eligible enterprises.
The account is also open to eligible non-resident individuals. However, as the details of cross-border investment activities are yet to be introduced, non-resident individuals can only be involved in general business under current accounts which is equivalent to operations outside the FTZ.