|Shanghai zone to allow free yuan convertibility
China will allow unfettered exchange of yuan in its first free trade zone, a draft plan seen by AFP today showed.
The free trade zone in Shanghai is intended to make the city into a true international trade and financial center and challenge the free economy of Hong Kong, analysts and government officials said, AFP’s Bill Savadove reports.
Premier Li Keqiang, who took office in March, is backing the zone.
The draft plan showed the FTZ goes beyond greater liberalization of trade to take in investment and financial services – including free convertibility of currency.
“Under the pre-condition that risk can be controlled, in the zone convertibility of the renminbi on the capital account will be conducted, the first to carry out and test [it],'' the plan said.
It does not explicitly state that the exchange rate will be purely market determined.
The yuan is convertible for trade but the government keeps a tight grip on the capital account.
A government official familiar with the plans said companies registered in the FTZ could open special accounts to freely exchange yuan, but with only a few exceptions they would be required to close their onshore Chinese accounts.
Under the draft plan, the FTZ would let interest rates be set by the market.
China currently fixes deposit rates by administrative order, but the central bank began allowing banks to decide their own lending rates in July.
According to the Ministry of Commerce, the 29-square-kilometer FTZ groups four existing areas in Shanghai: the international airport, deepwater port, a bonded zone and a logistics area.
The draft plan said the FTZ would “support'' establishment of foreign and joint ventures banks and welcome privately-funded financial institutions.
A financial industry executive briefed on the plans said Shanghai was chosen because of the success of Waigaoqiao bonded zone, which allows goods to be imported tax-free, unless they are to be sold within the domestic market.
ANZ Banking Group said in a research report this week the FTZ “could be a model for the next stage of China's economic reform, opening up and capital account liberalization.''
But it warned such liberalization would increase the risk of large capital flows, which could impact the economy.
For trade, the government envisions making the zone a center for cross-border e-commerce transactions, a plan which may require cooperation with a payments provider, officials said.
The zone would create a “platform'' for trading commodities such as metals, energy and farm products and “gradually'' allow foreign companies to directly trade commodities futures, the draft plan showed.
Within the FTZ regulatory controls will be relaxed in 19 different business sectors, ranging from banking to culture.
The State Council gave the FTZ its go-ahead in August and details will be announced after the “overall plan'' is approved on September 27, officials said.