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.