Cross-border capital flow eased in Shanghai FTZ

The Shanghai free trade zone (FTZ) relaxed barriers to cross-border capital flow on Friday, giving banks and firms in the zone greater freedom in foreign exchange. Multinationals can open international and domestic accounts to handle foreign exchange transactions. Foreign capital can transfer freely between the international account and offshore accounts. Domestic accounts are still restricted. The amount of foreign capital allowed to move into the rest of China from the FTZ is determined by the consolidated quota of foreign debt shared by various entities under the same company. Authorities have taken a cautious approach against capital poring out of the free trade zone for fear that speculative money cause problems for the largely closed financial sector. The program also entails consolidated netting between a company's onshore and offshore entities, thus significantly reducing the number of transactions and associated costs. The State Administration of Foreign Exchange (SAFE) started a similar trial in late 2012 to allow firms to manage their foreign exchange more efficiently and decided to expand the trial across the nation on June 1 this year. The People's Bank of China, the central bank, gave the go-ahead in February for the two-way cross-border flow of the yuan in the zone to meet working capital needs. The FTZ was established to better open the Chinese economy and is used to test financial measures that authorities would like to roll out across the country. "Underlying these new policies is active communication between policy makers and banks," said Jerry Zhang, Standard Chartered's China CEO. "Both regulators and banks contributed their share to moving policy forward. We tell regulators the needs of our clients hoping that they will consider companies' real needs when formulating policies." Banks participating in the yuan trial said that it had gone very well and are pushing for a national policy of the same kind to benefit more firms. While the foreign exchange trial will soon go nationwide, banks with branches in the free trade zone also expect the cross-border yuan trial to expand outside the Shanghai zone. "Many firms we are speaking to have shown great interest in the cross-border yuan cash sweeping service and are eager to learn its details, but at this stage it is only available for companies that have a presence in the zone," said Kee Joo Wong, head of global payments and cash management of HSBC Bank China. "But we believe it is very likely that the cross-border yuan cash sweeping pilot could eventually be rolled out for the rest of China, based on the successful implementation in the zone," Wong said. Expanding the cross-border yuan trial is also in line with China's agenda to promote the global use of renminbi, which rose to be the seventh most used payment currency earlier this year, according to global transaction service firm SWIFT. Standard Chartered Bank predicts that the yuan will rank only after the U.S. dollar, euro and the British pound as the world's fourth payment currency by 2020, adding that 30 percent of China's trade by then will be settled in yuan. Liu Linan, Deutsche Bank greater China rates strategist, said the growing acceptance of renminbi as a payment currency in international trade points to progress in promoting its use beyond Chinese borders, despite its recent depreciation against the greenback after China's exchange regulator widened its daily trading band to two percent on either side of the reference rate in February this year. "We've made our core strategy around the yuan, with our strong overseas network and committed trading team to support yuan business on a global scale," Standard Chartered's Zhang said. Authorities have taken a measured approach to loosening tight grips over China's financial systems in the free trade zone to ease capital flow while trying to hold risk at bay. These gradual measures underscore Shanghai's ambition to become a new regional treasury center after Hong Kong and Singapore. Doing that requires greater clarity in policy and realigning financial systems to international standards, according to HSBC's Wong. He added that sound legal, regulatory and tax frameworks are vital to ensure confidence among investors and the city should continue to work to attract more qualified financial professionals to deliver treasury solutions to corporate clients. "What we expect from regulators is a more streamlined process and less approval to go through, which has already happened in a lot of areas, not just in financial services, but also in business registration," Zhang said. "For companies and banks, what they want most for financial services is the easier the better, the faster the better," Zhang said.