China approves Shanghai new yuan pilot zone

[CityFarmer]

What is the implication...?

China approves Shanghai new yuan pilot zone

SHANGHAI – China has formally approved the establishment of a free trade zone that will trial yuan convertibility in Shanghai, the official China Daily reported on Thursday.

State media had reported in early June that approval of the zone was imminent, but details were scarce on the precise nature of the policy initiatives being contemplated.

However, the report said the zone would also serve to concentrate logistics and communications assets and provide tax advantages to resident firms.

China’s new leaders have signalled they want to quicken the process of making the yuan fully convertible over the next few years, as part of efforts to boost the currency’s use in trade and support wider financial reforms.

http://www.todayonline.com/business/chin...pilot-zone

[CityFarmer]

Further update...

Shanghai approves zone to test yuan for trading

SHANGHAI — China has taken another step toward loosening its capital controls and making its currency more freely convertible by approving the creation of a new kind of free trade zone here.

China’s State Counci said it was establishing a pilot zone in Shanghai to test some of the government’s financial overhauls, including interest rate liberalisation and full convertibility of China’s currency, the yuan, according to reports yesterday in the state-run news media.

http://www.todayonline.com/business/shan...an-trading

[Boon]

Free trade zone fits into Shanghai's financial ambition

Woo Jun Jie says plans for a free trade zone in Shanghai will give a major boost to the city's ambition to thrive as a global financial centre, because where trade goes, finance follows

Saturday, 20 July, 2013, 3:17am

Championed by Premier Li Keqiang, plans to establish a free trade zone in Shanghai have now been approved by the State Council. Combining three areas in the Pudong district, it will allow the Chinese government to experiment with economic liberalisation and renminbi convertibility.

More importantly, it will bring Shanghai closer to its goal of becoming a fully fledged international financial centre by 2020. Given the close linkages between trade and finance, Shanghai's development as a financial centre hinges on its success as a port city. The free trade zone is thus one step along the path that Shanghai needs to follow to establish its credentials as a financial centre.

History has shown that trade is the lifeblood of finance. Hong Kong's current success as a leading financial centre was predicated upon its beginnings as an entrepot, engaged in free trade with other Commonwealth nations under Britain's sterling area. It was only with the onset of the second world war that finance became delineated from trade. Nonetheless, Hong Kong's financial services sector continues to be involved in trade settlement and financing activities.

Similarly, Singapore's thriving banking sector first emerged during its time as a British colony, for the sole purpose of serving British trading activities. Its insurance industry was similarly established with its founding as a British trading post. While post-independence Singapore has focused on finance as a growth sector in its own right, trade finance and maritime insurance remain major components of its financial services industry.

Shanghai needs to take a leaf out of the books of its two regional rivals. First and foremost, trade activities need boosting and the free trade zone is obviously a step in the right direction. Integrating Shanghai into the global supply chain and increasing the amount of trade flowing through its ports will naturally create a demand for related financial services like trade financing and maritime insurance. While the free trade zone will attract the expertise and capital base of foreign financial firms and insurers, this demand will also encourage the development of local financial expertise.

More specifically, the free trade zone will stimulate what economists call "agglomeration" or clustering effects. Foreign financial institutions will be attracted to Shanghai while domestic financial institutions will benefit from the increased capital flows. This will spark a virtuous circle. Related industries, such as accountancy and legal services, will also thrive on the increased activity.

This trade-driven accumulation of financial capital will then provide a base on which other financial services such as securities and debt markets can be established. The government's intent to experiment with renminbi convertibility in Shanghai also bodes well for the development of a foreign exchange market.

Furthermore, plans to establish futures warehousing facilities will allow the city to strengthen its market for futures and commodities. In short, the promotion of free trade will spark a chain effect, leading to the development of a financial centre.

Yet, this does not mean the process is entirely organic. The government will have a key role to play throughout the process. In particular, Shanghai needs to strengthen its regulatory and legal framework.

The continued success of Hong Kong and Singapore as international financial centres is based on the robust regulatory infrastructure and a strong rule of law. To foster greater confidence in its financial services sector and attract foreign institutions, Shanghai needs to ensure a strong rule of law is established and enforced within its jurisdictions.

The government will have a key role to play ... Shanghai needs to strengthen its legal framework

Its financial regulatory agencies will also need to join hands and establish a robust and transparent regulatory infrastructure. Given that financial regulation in both Hong Kong and Singapore is carried out by a single chief regulator (the Hong Kong Monetary Authority and Monetary Authority of Singapore), Beijing should consider establishing a lead agency that co-ordinates all regulatory activities. Foreign financial institutions will find greater assurance within a more stable regulatory environment.

A final point to note is that China's plans to groom Shanghai into a major financial centre will have a significant impact on its regional rivals. Already, there are concerns that Shanghai will pose a threat to Hong Kong's future prospects. However, this may be premature and exaggerated. There remains scope for co-operation, and the burgeoning Asian markets will allow all three centres to thrive and even complement one another.

Hong Kong retains key strengths in its banking sector and loan syndication industry, while Singapore will continue to leverage on its capital markets, asset management industry and proximity to Southeast Asian economies.

There is little doubt Shanghai will siphon off some mainland financing opportunities, but both Hong Kong and Singapore can still rely on their existing comparative advantages and carve out individual niches in regional markets.

Rather than seeing each other as competitors, Shanghai, Hong Kong and Singapore should work with each other by developing complementary financial sector expertise and capabilities. This will require greater inter-government and inter-agency co-operation and dialogue.

Woo Jun Jie is a PhD candidate at the Lee Kuan Yew School of Public Policy, National University of Singapore

http://www.scmp.com/comment/insight-opin...l-ambition

[AlphaQuant]

Yet another move to liberalise things up
***************************

China will allow unfettered exchange of its yuan currency in its first free trade zone, a draft plan seen by AFP Thursday showed, in a bold push to reform the world's second largest economy.
The free trade zone (FTZ) in Shanghai is intended to make the city into a true international trade and financial centre and challenge the free economy of Hong Kong, a special administrative region of China, analysts and government officials said.
Premier Li Keqiang, who took office in March, is backing the zone -- which his cabinet approved last month -- to be one of the crowning achievements of his administration, they said.
The draft plan seen by AFP showed the FTZ goes beyond greater liberalisation of trade to take in investment and financial services, including free convertibility of currency.
Convertibility of the yuan -- allowing the currency to be freely bought and sold, and with it the movement of funds into and out of China -- is the main obstacle preventing Shanghai from competing with global financial centres such as Hong Kong, New York or London.
The government keeps a tight grip on the capital account -- investment and financial transactions, rather than those related to trade -- on worries that unpredictable inflows or outflows could harm the economy and reduce its control over it.
But companies in the zone will have the freedom to trade the yuan, also known as the renminbi, according to the plan.
"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)," it said.
China's yuan currency has so far only been convertible for trade -- to buy imported goods or turn revenue from exports back into local funds.
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-kilometre 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 venture banks and welcome privately-funded financial institutions.
At present, China's banking sector is overwhelmingly dominated by state-run entities.
"They want an offshore harbour, basically like Hong Kong," said a financial industry executive briefed on the plans.
Analysts said Hong Kong still has advantages over Shanghai, such as the rule of law and existing financial infrastructure, but it will need to do more to remain competitive.
The authorities in Beijing tapped commercial hub Shanghai because of the success of its Waigaoqiao bonded zone, the executive said, which allows goods to be imported tax-free, unless they are to be sold on within the domestic Chinese market.
The FTZ project as a whole "will be a bold step to escalate China's economic development to the next level", ANZ Banking Group said in a research report this week.
"Its success could be a model for the next stage of China's economic reform, opening up and capital account liberalisation."
But it warned such liberalisation would increase the risk of large capital flows, which could impact the economy.
For trade, the government envisions making the zone a centre 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.
But authorities have ruled out allowing casinos in the FTZ, officials said, a privilege enjoyed by Macau, another special administrative region of China.
Some Shanghai officials opposed the FTZ because ultimate authority will be in the hands of the central government, causing local resentment, the financial industry executive said.
The State Council, China's cabinet, gave the FTZ its go-ahead in August and details will be announced after the "overall plan" is approved on September 27, officials said.
China's parliament will have to approve rules for the zone at its annual meeting in March next year, but the process will be a formality.
Preparation work on the more sensitive financial reforms will take until the second half of next year, according to an official timetable.

[opmi]

I been to QianHai last Dec. Empty land. Cannot even come out of the MRT station. Got security guard.

Concept play. For stir fry stock for now.

[specuvestor]

Trend is clear that HK will be marginalised in the next 40 years. They have an even worse tenable position than Singapore with lower HKEr birth rate. and likely overwhlemed by mainlanders in 40 years and making the Basic Law irrelevant. Shanghai will overtake HK as the financial centre. China is long term patient.

[CityFarmer]

Trend is clear that HK will be marginalised in the next 40 years. They have an even worse tenable position than Singapore with lower birth rate. and likely overwhlemed by mainlanders in 40 years and making the Basic Law irrelevant. Shanghai will overtake HK as the financial centre. China is long term patient.

Hong Kong still have 40 years, not too bad.

We will never know what will happen 10 years down the road, let alone 40 years, so may be not to worry too much for vesting in HKEx...

[CityFarmer]

The view is matching with Mr. specuvestor's view, excluding the time frame.

Shanghai yuan move poses challenge to HK supremacy

SHANGHAI — Plans to adopt a convertible yuan in Shanghai’s new free trade zone are posing the biggest challenge yet to Hong Kong’s role as the global trading hub in the Chinese currency.

“Hong Kong’s competitiveness will be harmed with Shanghai having the capability to deal with offshore yuan. Hong Kong may become another Chicago, which was left behind as New York emerged as the United States financial centre,” said Sun Hung Kai Forex strategist Bruce Yam.

Transactions exchanging yuan for US dollars more than tripled in Hong Kong in the past three years to account for 17.7 per cent of the city’s US$275 billion (S$344.4 billion) average daily foreign exchange turnover, more than any other currency pair, the Bank for International Settlements said earlier this month. The deals helped push Hong Kong’s ranking in global currency trading to fifth this year from sixth in 2010, it said, with the top four being the United Kingdom, US, Singapore and Japan.

Shanghai’s free trade zone, occupying 29 sq km of land in China’s biggest commercial hub, is scheduled to open on Sunday. It will pilot reforms in several financial products, including a yuan that’s freely convertible with foreign currencies, the Shanghai Daily reported, citing Mr Wang Xinkui, Director of the City Counsellor’s Office.

A more flexible yuan will help Premier Li Keqiang in his pledge to cut the role of the state in the economy while the increased global use of the currency may also help diversify the nation’s US$3.5 trillion forex reserves, the world’s largest.

“With Shanghai coming into the picture, there will eventually be doubts on whether Hong Kong could retain the pricing power in offshore yuan rates,” said ANZ economist Liu Ligang. “There’ll also be a drain on Hong Kong’s yuan liquidity should companies start to move yuan trade settlements to Shanghai. The Hong Kong government must think of what to do now,” he added.

China’s central government gave Hong Kong a head start in cornering the offshore yuan business before allowing similar transactions in the nation’s richest city. Hong Kong banks started taking yuan deposits in 2004 and the first offshore debt issue in the currency, known as a dim sum bond, was sold in the city by the China Development Bank in 2007.

Yuan trading in Hong Kong took off in 2009, when China allowed cross-border settlement for trade. The city has the world’s largest offshore yuan savings pool of 695 billion yuan (S$142.5 billion) and handles almost 90 per cent of trade payments denominated in the currency.

Shanghai is expected to catch up quickly: It has more than triple the population of Hong Kong, a higher savings rate and a wider choice of investments denominated in the Chinese currency. It also has the advantage of being located on the mainland of the world’s most populous nation.

However, the Hong Kong economy enjoys many structural advantages over the Shanghai free trade zone.

Hong Kong topped the list of the world’s freest economies for 19 consecutive years, according to the Heritage Foundation’s 2013 Index, followed by Singapore and Australia, while China ranked a very distant 136th.

“Hong Kong still has a lot of other advantages and strengths that Shanghai doesn’t have. It has the soft power, the legal system, infrastructure and international standards. These are great soft powers that it’s hard for any Chinese cities to catch,” said Citigroup’s Hong Kong-based yuan products manager Tan Shiming. BLOOMBERG
http://www.todayonline.com/business/shan...-supremacy

[opmi]

Shanghai do China business 够了。 Just see TaoBao, Alipay, Weibo, 银联. World has to follow China standard. If they want a piece
of the action.

[CityFarmer]

Singapore can co-exist and prosper with Shanghai, by providing yuan services for China companies into SEA, which is closer in proximity.

Hong Kong might need to think a way out.