China approves Shanghai new yuan pilot zone

[specuvestor]

By Bloomberg News
Sept. 27 (Bloomberg) -- China will allow trial convertibility of the yuan under the capital account in Shanghai’s free-trade zone with the pre-condition that risks can be controlled, the State Council says in plan for the zone.
• China to test interest rate liberalization
• FTZ plans to make interest rates more market-oriented
• Plans to liberalize cross-border financing
• China to allow foreign cos.’ trading of commidities futures “gradually”
• To allow China banks to conduct offshore business
• To allow qualified foreign financial institutions to set up bank
• To allow foreign cos. to make, sell games, amusement devices
• To allow trial of foreign-funded health insurance cos.
• To allow set up of wholly foreign-owned shipping managemet companies
• State Council posts general plan for zone on central government website

[CityFarmer]

Last Saturday The Straits Time, has an article on Shanghai FTZ. The FTZ will allow foreign hedge funds operation, under Qualified Domestic Limited Partner (QDLP) programme. Each fund can raise US$50 mil.

There are six funds selected, namely
- Oaktree, Och-Ziff, Citadel and Canyon Partners - from US
- Winton Capital and Man Group - from UK

[CityFarmer]

Shanghai Free Trade Zone a test bed for bold financial reforms

SHANGHAI — More than three decades after Chinese paramount leader Deng Xiaoping’s experiments with capitalism in Shenzhen began lifting millions out of poverty, his successors are applying the same strategy to the tougher task of making China rich.

Reprising the role of Shenzhen is the 29 sq km China Shanghai Pilot Free Trade Zone opening tomorrow on the outskirts of the city, comprising office buildings, warehouses and concrete parking lots.

China’s State Council yesterday formally announced detailed plans for the area, saying it would use it as a test bed for bold financial reforms, including a convertible yuan and liberalised interest rates, as well as open up the sheltered services sector to foreign competition. By giving markets and the private sector a bigger economic role, China may become a high-income nation by 2030, according to the World Bank.

No specific timeline was given for implementing the reforms, though these should be carried out within two to three years, the State Council said, adding financial liberalisation may depend on adequate risk controls.

Credit Agricole economist Frances Cheung noted the cautious pace at which the liberalisation would take place, saying: “One thing that is relevant to the yuan is under Point 2, where eligible Chinese banks in the free trade zone are allowed to do offshore business, which is not the opening up of the onshore yuan market as some might have looked for.”

An executive at a foreign multinational in Shanghai said: “Is this Shenzhen 2.0 heralding the beginning of a new era in trade, or a flash in the pan to simply boost economic confidence?”

In addition to setting goals for financial services, trade and governance, the announcement details initiatives covering 18 different industries ranging from shipping and insurance to education and foreign banks.

The government hopes the free trade zone will reinvigorate the economy and help Shanghai compete with Hong Kong as a financial centre.

The opening of the Shanghai free trade zone comes ahead of a November meeting of the Communist Party’s Central Committee, at which President Xi Jinping and Premier Li Keqiang are expected to push forward more detailed economic plans. It was at such a plenary meeting in 1978 that Deng laid out his plans for reforms.

Officially established in 1980, the Shenzhen Special Economic Zone allowed foreign investors to set up factories that employed workers to make shoes, toys and electronics for export. Policies tested there were later spread nationwide, sparking a more than 97-fold expansion of China’s economy. More than 600 million people have been lifted out of poverty since, according to the United Nations.

State media announced on Thursday that China will soon join negotiations for an agreement on trade in services with the World Trade Organization, and many have speculated the Shanghai free trade zone is an opening move to position China for membership in the US-led Trans Pacific Partnership initiative.

Meanwhile, Hong Kong Chief Executive Leung Chun-ying saw no threat from the Shanghai free trade zone to Hong Kong’s position as a financial hub. “One of the most important factors is Hong Kong’s rule of law,” he said yesterday. “Hong Kong is a hub for top-notch financial professionals from both China and overseas. It also has sound supporting professionals in the legal and accounting sectors.” AGENCIES

Main reforms planned in the free trade zone

FINANCE:

* BANKING - Private capital can set up joint venture banks with foreign lenders. Chinese banks can conduct offshore business. Non-deposit banks will be permitted in the future.

* HEALTH INSURANCE - Foreign health and medical insurance institutions will be permitted to operate on a trial basis.

* FINANCIAL LEASING - Financial leasing companies operating one plane or one ship will not be subject to paid-in capital requirements. Financial leasing companies will be permitted to conduct related commercial factoring business.

TRANSPORT:

* OCEAN SHIPPING - Foreign partners will be allowed to hold larger stakes in joint venture global shipping enterprises, up from the current limit of 49 per cent.

* INTERNATIONAL SHIPPING MANAGEMENT - Foreign firms can set up solely-funded shipping management companies.

COMMERCE AND SERVICE:

* VALUE-ADDED TELECOMS - Foreign companies will be permitted to operate some specialised value-added telecommunications services. Those not meeting China’s existing laws and regulations will need special State Council permission.

* GAME MACHINES - Foreign companies can produce game machines, which they can also sell in China after approval by Chinese censors.

PROFESSIONAL SERVICES:

* LEGAL SERVICES - China will study the methodology and mechanisms for cooperation between Chinese legal offices and their foreign counterparts, as well as Hong Kong and Macau.

* CREDIT INFORMATION - Foreign companies can set up credit information firms.

* TOURISM - Joint venture tourist agencies will be allowed to conduct overseas tourist business, with the exception of Taiwan.

* HUMAN RESOURCES - Foreigners may own up to 70 per cent of joint venture recruiting firms, while Hong Kong and Macau investors can set up solely-funded recruiting firms. The requirement for paid-in capital for foreign-funded firms will be reduced to US$125,000 from US$300,000 currently.

* INVESTMENT MANAGEMENT - Foreign-funded shareholding investment companies are permitted.

CULTURAL AND SOCIAL SERVICES:

* ENTERTAINMENT VENUES - Foreigners can set up wholly-owned entertainment venues.

* EDUCATION AND TRAINING - Joint-venture educational and job-training institutions are allowed.

* MEDICAL SERVICES - Solely foreign-owned medical service institutions are allowed.
http://www.todayonline.com/business/shan...al-reforms

[CityFarmer]

A different view on FTZ from an American's view point. I always view American's view on China issue with a grain of salt, in fact with lot of salt.

Shanghai Free Trade Zone a symbol, not threat

Hong Kong is dead. Economic roadkill on China’s way to world domination. A new free trade zone in Shanghai will supplant the former British colony as the gateway to the world’s most dynamic economy.

That’s the chatter in the city of seven million people, where some business leaders fear becoming China’s Chicago, long ago eclipsed by New York as a financial and cultural centre. Shanghai’s new free trade zone, which opened for business yesterday, offers freer yuan trading, more flexible interest rates, relaxed restrictions on foreign money and maybe even access to Twitter, Facebook and other websites banned across China.

None other than Mr Li Ka Shing, Asia’s richest man, has warned that Shanghai “will affect Hong Kong heavily” and the city must act immediately to raise its competitiveness. That warning is as intriguing as it is silly.

To spark an Adam Smith moment in Shanghai, the Communist Party would, virtually overnight, have to embrace a variety of things it has avoided. Leaders would have to create something approaching a first-world legal system and sound rule of law, ensure social justice, force politically connected companies to compete on their own and allow unfettered free speech and access to websites banned for more than a year for daring to run stories about official corruption. China would have to tolerate Google and stop rerouting anyone typing “Tiananmen Square crackdown” to bland tourism brochures.

In fact, there’s reason to worry a Shanghai trade zone that’s free in name only will exacerbate the country’s financial woes. This zone could well sap momentum and the will to implement more sweeping reforms nationally, which China desperately needs.

Another risk it might not appreciate is the danger of welcoming capital flows of the kind that overwhelmed South-east Asia in 1997. To maintain 7.5-per-cent growth, as Premier Li Keqiang has pledged, means more borrowing by state-owned companies. That’s why it’s highly unlikely Beijing will allow complete yuan convertibility and full-blown interest-rate deregulation.

Leaders are also risking a flight of capital from other parts of the country. China can’t contain free capital flows within a specific geographic region only a taxi ride away from the nation’s financial capital. The zone will be viewed immediately as a kind of “green zone” for the elite who became millionaires and billionaires though illicit land grabs, old-fashioned rent-seeking and insider trading. Wouldn’t this create fresh avenues for corruption among party officials? State-owned banks outside the zone also may experience runs on balance sheets.

If China is going to open up, it should do so nationally and evenly. A freed yuan would accelerate and deepen its integration with the world economy, create the bigger service sector it needs to wean itself off exports, enable markets to better price risk, reduce trade frictions and insulate it from US charges of currency manipulation.

Far from achieving any of these goals, this Shanghai half-measure is a distraction. So then, what is the real motivation here? Surely, political symbolism is part of the motivation. As they try to hone their reformist chops, who better for Mr Li and President Xi Jinping to channel than Deng Xiaoping, who in the 1980s experimented with the Shenzhen Special Economic Zone?

The Shanghai experiment also seems aimed at Hong Kong’s stubborn pro-democracy movement, which is set on pushing the case for the universal suffrage Beijing has no intention of granting.

“It’s leverage over Hong Kong,” says Mr Andy Xie, an independent economist. “If Hong Kong becomes ungovernable, the Shanghai Free Trade Zone will become real. Now, it is designed as a bird in a cage, as all China’s reforms have been.” BLOOMBERG

ABOUT THE AUTHOR:

Tokyo-based William Pesek won the 2010 Society of American Business Editors and Writers prize for commentary. This is abridged from a longer commentary.
http://www.todayonline.com/chinaindia/ch...not-threat

[CityFarmer]

It reminded me of Mr. Sim's (Creative founder) "No U-turn syndrome". What a change in China...

Shanghai FTZ restricted list makes investment decisions easier

SHANGHAI — The Shanghai government yesterday published a list of sectors where foreign investment will be banned or restricted within its new free trade zone (FTZ), but in a departure from usual practice, no permission will be required to invest in other sectors.

The China (Shanghai) Pilot Free Trade Zone opened for business on Sunday and officials have outlined ambitious plans for bold reforms in the country’s currency, interest rates, trade and industry policies in the zone, but without giving details on implementation.

Top leaders were not present at the FTZ’s opening ceremony and state media has tried to manage expectations by quoting unnamed officials saying dramatic reforms are unlikely to be rolled out this year.

The list is the first of its kind in China and a step forward compared with its national “foreign investment catalogue” that divides investment permissions into broad categories — encouraged, allowed, restricted or banned — which foreign companies complained were too vague and inconsistently interpreted to be of use.

The “negative list” approach means that if a sector is not on the list, foreign companies can invest in it without any restriction or joint-venture requirements; overseas entities just need to register for their projects without applying for approval.

“For all fields not on the negative list, an approval system for foreign investment projects is now replaced by a registration system,” the Shanghai municipal government said in a statement accompanying the list. “Those projects related to national security, censorship and anti-trust investigations must also comply with related regulations.”

The negative list consists of hundreds of line-item restrictions in 16 major industrial categories, ranging from culture to hydropower to telecommunications, many of which trade partners argue China committed to opening up long ago when it was allowed to join the World Trade Organization.

For example, foreign firms are still banned from investing in China’s tightly controlled media organisations; from publishing newspapers, magazines or books; and from producing electronic publications.

The list, however, includes items that allow limited foreign firms investment in new economic areas, such as the exploration of shale gas. For the first time, foreigners will be permitted to invest in projects exploring non-traditional national gas resources, such as shale gas and sea-bottom natural gas, but only via joint-ventures with Chinese partners. REUTERS
http://www.todayonline.com/business/shan...ons-easier

[CityFarmer]

Base on the experience of "one country, two system", the FTZ seems like another "Hong Kong". But overall, a positive move for RMB internationalization.

China mulls adopting international law to spark free trade zones

HONG KONG — China is considering the use of international law in a big push to get free trade zones up and running to promote the use of the yuan in global trade, which could challenge Hong Kong longer term as the main offshore centre for the currency.

Sources said Chinese leaders have been discussing the adoption of an international legal system in the free trade zones (FTZs) for the first time to help lure foreign companies, although views are varied.

“Authorities recognise that providing a robust legal framework and infrastructure will attract global companies,” said a Hong Kong government official briefed on the FTZ discussions. “But agreement on this is far from uniform.”
...
http://www.todayonline.com/business/chin...rade-zones

[CityFarmer]

The milestone of the start of financial reform in China...

China to start rolling out Shanghai FTZ reforms in 3 months

[SHANGHAI] China will begin rolling out financial liberalisation reforms in the Shanghai free trade zone (FTZ) within three months, the People's Bank of China (PBOC) said in a statement on Wednesday.

The announcement came a day after the central bank provided additional detail on the policies it intends to trial in the Shanghai FTZ, launched in September, to help restructure the world's second largest economy away from its credit-intensive, export-focused model. "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 posted on the bank's Shanghai branch website. "In about a year, we will implement new financial measures that can be copied and extended in other areas." Zhang said the reforms would be launched within three months, evaluated after six months and formal policies would be fully implemented by the end of a year.

The policies will serve as models for other Chinese regions as they move to create their own FTZs, Zhang said. -Reuters

Source: Business Times Breaking News

[AlphaQuant]

Changes to the Chinese financial system continues

http://www.reuters.com/article/2014/02/2...WZ20140226

Below article seems to be biased towards China being too slow, but that is completely wrong IMHO. Slow and steady is the way to go, we are witnessing the smartest overhaul of a closed system yet.

In the meantime, the usdcnh has thrown a bunch of hot money hot and bothered with a 1% depreciation this week - quite a bit for a 1.5% vol base - reminding all that the PBOC is still very much in charge.

*****************************

Feb 26 (Reuters) - China will completely liberalise interest rates offered on smaller foreign currency accounts in the Shanghai free trade zone (FTZ), the central bank said on Wednesday.

The People's Bank of China (PBOC) will abolish the upper limits on deposit rates offered by banks on foreign exchange accounts holding below $3 million as from March 1, the central bank's Shanghai headquarters said in a statement published on its website, shanghai.pbc.gov.cn.

The reform will primarily benefit smaller customers in the zone, as lending rates and deposit rates on accounts holding more than $3 million have been liberalised throughout China since 2000.

China launched the Shanghai FTZ in September 2013 to help experiment with economic reforms, in particular financial innovation, hoping successful experiments there could eventually be duplicated throughout the country.

However, the FTZ has so far proven a disappointment to those who expected quick, radical change. Few multinationals have relocated to the zone given its distance from Shanghai's central business district, the FTZ's stratospheric rents thanks to rampant speculation and uncertainty over which reforms will be rolled out when.

The cautious nature of this latest reform highlights regulatory caution over the major steps authorities have promised to enact in the zone, namely testing the full convertibility of the yuan and liberalising rates on yuan-denominated deposits. The latter is seen as the crucial lever for restructuring China's financial system.