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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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