Shanghai moves toward full RMB convertibility
05 July 2013
News, China, Global
By Toby Garrod
Shanghai has received State Council approval to establish a pilot free trade zone (FTZ) to explore investment and trade policy innovations and expand the opening of the services industry. The test will involve financial reforms including interest rate liberalisation and full convertibility of the RMB.
The State Council considers the experiment an essential step towards upgrading China's economy. It also expects the pilot's eventual national roll out.
The FTZ in Shanghai will be the first FTZ within mainland China, incorporating the special custom zones of Yangshan Deep Water Port, Pudong Airport and the Waigaiqiao Port. The trade volume of Shanghai's bonded zones represented more than US$100 billion in 2012, or 3% of China's overall trade volume.
The announcement came only a few days after the high profile Lujiazui Financial Forum, at which China's financial leaders released a series of ambitious plans about China's future financial reform agenda. Beijing's support for Shanghai's continuous efforts to build an international financial centre by 2020 was particularly highlighted.
As part of that, Governor Zhou Xiaochuan said that Shanghai’s efforts to emerge as an international financial centre by 2020 have achieved fruitful results in developing capital markets, pioneering RMB cross-border businesses, and cultivating SHIBOR as the benchmark market rate. Going forward, the central bank stated that it will continue to push for the opening up of China’s capital markets and support Shanghai’s bid to become a global financial centre, especially a global centre for innovation, pricing, transactions and clearing of RMB-denominated financial products.
The pilot FTZ includes steps to: 1) Create tax-friendly facilities for trade and investments within the FTZ; 2) Promote China's interest rate liberalisation, and push forward eventual RMB convertibility under the capital account; 3) Encourage financial product innovations; and 4) Promote the development of offshore businesses.
Shanghai is expected to allow corporates to freely convert other currencies with the RMB within the FTZ, and to buy overseas assets and equities and raise funding abroad. In addition, foreign investment and funding activities for both domestic and international companies will be promoted within the FTZ. Shanghai also plans to test selected offshore businesses within the zone, including offshore banking activities and FX denominated cross-border financing.
The launch of a FTZ in Shanghai is in line with Beijing's efforts to finalise, by the end of this year, an operational plan for the eventual full convertibility of the RMB. Beijing is reportedly expected to liberalise the capital account by 2015; something that is eagerly anticipated by a number of asset management firms globally.
“We fully expect that within the next five years the RMB is going to become a reserve currency, and we believe it’s going to continue trending stronger, bringing benefits of 1.5% to 2% per year,” Endre Pedersen, managing director, fixed income at Manulife Asset Management (Asia) told Asia Asset Management in an earlier interview. “It will continue to strengthen in regard to the US dollar and other G7 currencies, so it’s a large, core low volatility trade.”
An FTZ in Shanghai could be used as a testing ground for the RMB's full convertibility whilst simultaneously helping to establish Shanghai as a key regional financial, trading and shipping centre within Northeast Asia. It would also help to pave the way for Shanghai's on-going transformation into a global financial centre.
Following the recent opening-up of Qianhai (an experimental financial zone in Shenzhen) and Wenzhou (designated as trial area for financial reform), the creation of Shanghai's FTZ trial confirms the commitment of Beijing's top leaders to continue pushing forth on its plans for eventual full RMB convertibility and capital account liberalisation.
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