Banking & Finance

Sky’s the limit

New currency rules announced for Shanghai’s free trade zone


The view of Shanghai’s Pudong last Friday

Shanghai says it will soon be centre-stage as one of the world’s leading commercial and financial hubs. So it must have been exasperated to spend much of the last week hidden beneath a shroud of toxic air. The smog was so thick last Friday that the skyline of the financial district in Pudong was barely visible from a few hundred yards away across the Huangpu river. Flights were grounded too.

But at least some of the obscurity enveloping the city’s newest jewel – the four plots of land that make up the China (Shanghai) Free Trade Pilot Zone – is showing signs of clearing.

The 29-square kilometre area has already generated plenty of excitement locally, bringing out the pioneering spirit in old ladies like Mrs Zhou, who has been busy setting up companies there.

Zhou, a retiree, has no real plans to run a business in the zone, says CBN. But a few weeks ago she registered two shell companies in tiny cubicle spaces in one of its buildings. Her view is that the quota for new firms is going to run out as more companies take advantage of the streamlined process to set up there (see WiC211) and that she will then be able to sell her registrations for a profit.

“Wherever there are hot spots, there is opportunity,” Zhou told CBN confidently. “Speculating on scarce resources is always worth a try.”

But Amigo Xie, a partner at the law firm K&L Gates, wonders whether Zhou and her fellow speculators have grasped the longer-term logic of trying to corner Shanghai’s flagship project. “They see it as having a house there,” he told City Weekend magazine. “Long term, the absurdity is that if the experiment fails, the licences will be worth little. But if it succeeds, they will be worth even less since entry barriers will be further eased and the liberalisation will spread to the rest of the city and the country.”

It sounds like Mrs Zhou isn’t planning on hanging around that long. She says she will sell her licences within the next six months. for twice the Rmb20,000 ($3,292) in fees she paid for them.

About 1,500 companies completed registrations for the zone in the two months after it formally launched, most of them trading businesses. Rental costs for building space are also climbing, 21CN Business Herald reports, with bonded warehouses looking like an early sweet spot after the first auction in the zone at the end of November. Overseas investors see a major benefit. “The pieces from abroad are bonded as long as they are stored in the assigned storage site in the zone,” Hu Huanzhong, the organiser, told the China Daily.

National Business Daily says that the the first vault will open this month too, serving customers registered in the zone by storing luxury items, plus gold, silver and hard currency. Indeed, gold is another focal point, with the Shanghai Daily reporting that the city’s Gold Exchange is finalising plans to launch an international board in the zone to attract capital from offshore.

But financial institutions and international firms have been more cautious in registering to do business, with only 38 foreign-funded companies taking the plunge. That’s a mere 3% of the total number registered at the end of November.

Interest might start to pick up after an announcement from the People’s Bank of China last week which laid out more detail on new financial regulations for the zone.

The pilot regime will be based around two types of free trade account (or FTAs); one designed for residents of the zone and the other for non-residents. Capital transfers from these accounts are going to be specially tagged by regulators, allowing for monitoring of financial flows. But the new rules suggest that transfers will be largely freed up between resident FTAs and foreign accounts, as well as between resident and non-resident FTAs.

Transfers between free trade accounts and regular Chinese accounts are going to be policed in line with current policies.

In essence the plans free up the movement of capital between accounts in the zone and the rest of the world. But these flows are going to stay segregated from the rest of China’s financial system, which retains a closed capital account.

What about the main benefits for free trade account holders in the zone? One is that companies there can source finance from overseas markets to deploy elsewhere in China as loan repayments or for investment.

Another benefit is that residents in the zone will be able to transfer money abroad without going through the same approval process as the rest of China.

Companies registered in the zone will also be allowed to issue onshore bonds in renminbi, says the PBoC.

The central bank also says that – at an unspecified future point – cash held in the zone will be freely convertible into other currencies.

Shanghai’s authorities have been impatient to get started with the experiment, and the tone of the PBoC announcement is that the wait is over.

“Financial reform in the pilot zone is not in the past tense, nor the future tense, but the present tense,” PBoC Shanghai chief Zhang Xin said in a statement on the bank’s website, confirming that the policy rollout will start within three months and is due to be complete by the end of next year.

More questions still need to be answered. Further explanation of how exactly residency status is going to be defined would be very useful for Mrs Zhou, for instance, as she wonders when it will be best to sell her shell companies.

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