Key Points

  • Free trade account system to be established in PFTZ
  • Facilitation of foreign exchange conversion in investment and financing
  • Enterprises in the PFTZ will be allowed to set up an RMB “cash pool” for cash management facilities
  • Interest rate liberalization expected to be introduced

Background

On December 2, 2013, the People’s Bank of China (“PBOC”) issued the Opinion on Support of Finance in China (Shanghai) Pilot Free Trade Zone (the “PBOC Opinion”). The PBOC Opinion has 30 provisions in total, which outline the financial reform measures that might gradually be introduced in the Pilot Free Trade Zone (“PFTZ”).

Highlights of the PBOC Opinion

Free Trade Account System

According to the PBOC Opinion, enterprises and individuals in the PFTZ may open Free Trade Accounts for Residents (“FTA”), with foreign enterprises and individuals allowed to open Free Trade Accounts for Non-Residents (“FTN”) with banks in the PFTZ. Free fund transfers are allowed between FTAs and offshore account, non-residents’ onshore accounts, FTNs and other FTAs, while the fund transfers between FTAs and other on-shore (China) accounts remain subject to the current cross-border fund transfer restrictions. With the establishment of the FTAs and FTNs, funds in offshore accounts may be transferred into the PFTZ without any restrictions.

Facilitation of Foreign Exchange Conversion in Investment and Financing

Under current laws, foreign invested enterprises and foreigners are  not allowed to invest in China’s stock market. According to the PBOC Opinion, foreign-invested financial institutions established in the PFTZ, other foreign-invested enterprises established in the PFTZ, and foreign individuals working in the PFTZ will be able to invest and trade on securities and futures exchanges. Chinese individuals and companies in the PFTZ will be allowed to invest in overseas markets including stocks and derivatives. In addition, enterprises established in PFTZ can directly process with the bank for cross-border investment without the pre-approval as required under current existing laws for enterprises established out of PFTZ.

Cash Management and RMB Cash Pool

Enterprises in the PFTZ will be allowed to set up a “RMB cash pool” account to carry out centralized RMB cash management for their domestic and overseas affiliates. In other words, RMB funds may  freely flow within the group companies without the need to specify  the reasons or usage and without submitting any documentation. The cash pool business, however, applies only to RMB currency at present, although the PBOC Opinion also indicates that the administration of foreign currency cash pools will be simplified to encourage multinational companies to establish settlement centers in the PFTZ.

Interest Rate Liberalization

On July 20, 2013, PBOC announced the removal of lending rate control. Banks in China will no longer be subject to a maximum of 30% discount to the benchmark lending rate, which is deemed as an important step   in interest rate liberalization. However, such announcement does not touch on the control of the deposit rate. The PBOC Opinion goes a step further in this regard and provides that the interest rate system within the PFTZ will be changed from the current PBOC benchmark to a market-based benchmark when the market conditions permit. Though  a schedule for interest rate liberalization has not yet been announced, banks established in the PFTZ may expect to formulate their own interest rates based on the market conditions without an upper or lower limit.

Conclusion

The PBOC Opinion gives a general roadmap of the financial reforms as specified in the Overall Plan of PFTZ issued by State Council in September, 2013.  Many of the provisions, however, cannot be implemented in practice without further explanation or implementing rules. Investors can expect further detailed rules and procedures to be issued in the future.