CHINA (SHANGHAI) FREE TRADE ZONE Implications and Considerations. Huabin Wang

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1 CHINA (SHANGHAI) FREE TRADE ZONE Implications and Considerations Huabin Wang Assistant General Manager Bank of China Limited, London Branch September 23, 2014

2 Table of Contents 1 CHINA (SHANGHAI) FREE TRADE ZONE 2 INTERPRETATION OF FTZ FINANCIAL POLICIES 3 DEBATES AND OUTLOOK 2

3 China s (Shanghai) Free Trade Zone Officially launched on 29 Sep 2013 Keywords: China s Pilot Scope of implementation: 29 kilometers, including 4 existing zones: Waigaoqiao Free Trade Zone; Waigaoqiao Free Trade Logistics Park; Pudong Airport Comprehensive Free Trade Zone; and Yangshan Free Trade Port Area. 3

4 Why Shanghai FTZ at the right time China Today Special Stage Financial reform Economic growth slowdown Throes of the economic restructure Digestion of the 4trillion Yuan economic stimulus FORCEFUL REFORM breakthrough RMB internationali sation Position of Shanghai RMB home market In theory, Shanghai should have played more important role in RMB internationalisation. Why? issues in infrastructure/system, relationship between the government and the market How? use Shanghai FTZ as a pilot zone Duplicable mode Progress in a controlled manner 4

5 Special path of RMB internationalisation Traditional Currency Internationalisation Capital account open is a MUST for a currency s internationalisation Innovative RMB Internationalisation Separate from Circulation first, convertibility follows when time comes RMB free convertible Capital account control Let RMB circulate under the capital account but keep the control of its convertibility to protect domestic macro economy. 5

6 Shanghai FTZ Vs Reform A challenge of the traditional philosophy Cannot do -> can do (negative list management) National treatment before admittance Significance to China s Reform Promote reform by opening up Accelerate economic restructuring by opening service trade Strive for higher-standard opening by the pilot free trade zone 6

7 Shanghai FTZ Policy Framework Shanghai FTZ Policy Framework Functional transformation of government Open up investment sectors Open up Financial services Transformation of Trade development approach Simplify the approval process, strengthen the supervision function, and complete the review process Custom Frontier opening, second-tier effective and efficient control Changes in polices re tax, forex, custom and commerce. Opening up of financial, shipping, commercial, cultural, social and professional services pre-national treatment, and negative list To build a system to promote overseas investment Innovative financial policies To establish financial transaction platform Opening up of FIs and services Promote the development of financial services To encourage the establishment of the Asiapacific headquarter, operational centre, and international settlement centre To establish international commodities trading and resources allocation platform Promote Shanghai as a shipping centre and business such as finance lease, cross-border e- commerce etc. 7

8 Snapshot of entities in the FTZ By the end of June 2014, there are 10,445 companies registered in the FTZ, of which 1,245 are foreign funded. By the end of July, 84 licensed FIs and 2878 financial service firms registered in the FTZ. Business registration Chinese Companies 88% Industries Foreign Companies 12% Services 20% Type No. Foreign Banks 23 Transaction Clearing Institutions 17 FI reinvestment projects subject to CSRC approval Chinese Banks 14 Insurance companies 11 Commodities trading platform 2 Non-banking FIs subject to CBRC approval 2 Type 15 No. 8 Trade 58% Others 3% Investment 19% Financial leasing companies, private equities 595 Financial info providers 267 Investment and asset management companies 2101

9 Table of Contents 1 CHINA (SHANGHAI) FREE TRADE ZONE 2 INTERPRETATION OF FTZ FINANCIAL POLICIES 3 DEBATES AND OUTLOOK 9

10 Interpretation of FTZ financial policies CAPITAL ACCOUNTS OPENING: Based on the capital account definition of IMF, there are 43 capital accounts, most of which have been liberalized in China. At present, there are only three capital accounts subject to control in China 1. Foreign direct investment shall be subject to approval and overseas investment are also restricted 2. Chinese residents shall not have foreign debts, and foreign debts are subject to scale management. 3. China s capital market shall not be open to foreign capital, which may participate in the market by special channels, such as QFII. OBJECTIVES: Deepen innovation and opening up of financial services Accelerate the innovation of financial system. Under proper risk control, the China (Shanghai) Pilot FTZ will pilot RMB capital account convertibility, interest rate liberalisation and the cross-border use of RMB. POLICIES ANNOUNCED IN: RMB internationalisation Interest rate liberalisation Foreign exchange rate liberalisation Opening up of the capital accounts 10

11 FTZ financial policies RMB internationalisation 1 Cross-Border Two-Way RMB Cash Pooling RMB cash pooling Remove previous restriction on quota. Free Fund transfer between offshore and onshore, cash flows generated in production, operation and industrial investment activities. No cash flows from financing activities at moment Subsidiary A Subsidiary A Subsidiary B Account of enterprise in the FTZ Subsidiary B Subsidiary C Subsidiary C 11

12 FTZ financial policies RMB internationalisation 2 Overseas RMB Loan for Enterprises in the FTZ Benefits to Clients More access to offshore capital/finance market Lower financing costs Enterprises registered in HK Case Study: Cost comparison on three scenarios for a 1-year RMB loan Loan costs Around 4.2%-4.4% Other costs Financing guarantee issuance fee >1% Loan-to-deposit ratio & amount limitations None Enterprises registered in the FTZ Onshore enterprises(outside the FTZ) Around 5.2% None None 6% None Strict limitations apply tight liquidity in the market 12

13 FTZ financial policies RMB internationalisation 3 Centralised RMB Cross-border Current Account Receipt and Payment Benefits to Clients Netting payments Efficient payments Less position management costs Onshore (outside FTZ) Receipt and Payment under the traditional supply chain 40 A B C Offshore Overseas company 13 Onshore (outside FTZ) A B C Receipt and Payment under the FTZ mode FTZ Special RMB deposit account in a bank located in Shanghai 20 Offshore Overseas company

14 Commercial Opportunities Cost wise Operation FTZ financial policies RMB internationalisation 4 Cross-border E-Commerce RMB Payment Provide opportunities for E- commerce firms get into the vast Chinese market i.e. 2013, the total transaction volume in China E- commerce market was 9.9trillion Yuan (around US$1.57trillion) Lower cost, saving forex conversion cost Enhance the efficiency of fund settlement with upstream and downstream enterprises 14

15 FTZ financial policies Interest rate liberalisation Remove the upper limit of IR under current accounts in the FTZ(small amount, foreign currency) Issuance of transferable CDs Principles towards IR liberalisation: foreign currency goes first, RMB follows large amount goes first, small amount follows; Loan goes first, deposit follows Enhance pricing supervision mechanism during the IR liberalisation 15

16 FTZ financial policies Forex management reform Cross-border foreign currency cash pooling Benefits to Clients: Manage the foreign debt and lending quotas of all its members on a centralised basis Enhance the efficiency of cross-border capital use. Reduce financial cost. Domestic foreign currency main account of firm in the FTZ Net out-going transfer cannot exceed 50% of owner s equity of the group. Net in-coming transfer cannot exceed combined foreign debt limit of all members International foreign currency main account of firm in the FTZ Cross-border Current Account Foreign debt account Capital, Assets Realisation & reinvestment account Settlement Account (Overseas subsidiaries) Other overseas subsidiaries Domestic cash pool Overseas cash pool 16

17 FTZ financial policies Opening of capital accounts Split accounting system by introducing Free Trade Account The split accounting system in the FTZ enables an enterprise to open both traditional account (second-tier account) and FTA (first-tier account) at the same time. FTU FREE TRADE UNIT FTE FREE TRADE ENTITY FTN FREE TRADE NON-RESIDENT FTI FREE TRADE INDIVIDUAL FTF FREE TRADE FOREIGNER 17

18 FTZ financial policies Opening of capital accounts Split accounting system by introducing Free Trade Account Tier-two limited access +Strict control Frontier prudent management Other settlement accounts under the same entity FTE Free Trade Entity account Offshore accounts Other settlement account NRA outside FTZ (OSA/NRA) Other FTEs FTN None residents free trade account Conditional circulation Treated as cross-border Current account, direct investment 18 Onshore (outside the FTZ) In the FTZ Offshore

19 Table of Contents 1 CHINA (SHANGHAI) FREE TRADE ZONE 2 INTERPRETATION OF FTZ FINANCIAL POLICIES 3 DEBATES AND OUTLOOK 19

20 Debates and Outlook HESITATE, WAIT AND SEE? 1 2 HOWEVER, the RMB internationalisation is a fact and the journey is irreversible. The only question is the pace of travel not the direction. Creating Shanghai FTZ is a crucial move for China in executing its proactive opening-up strategy to explore best practices in financial management that are replicable nationwide The opening-up policies being implemented in Shanghai FTZ will largely shape the future landscape of China s financial services industry. 20

21 Debates and Outlook there is a big future for Shanghai Free Trade Zone, there is a big future for Shanghai - said Premier LI Keqiang during his visit to Shanghai FTZ on September 18, 2014 if Shanghai Free Trade Zone goes well, it is expected to achieve (RMB) circulate first and free convertibility follows in three years (2017). -Dr. CAO YuanZheng (Group Chief Economist, Bank of China) said on September 20,

22 Disclaimer This presentation and any associated material (collectively, the Material ) has been prepared by Bank of China Limited London Branch and Bank of China (UK) Limited. The information contained in the Material is for general reference only and is provided on an "as is" basis without warranty of any kind, may be changed at any time without prior notice and may not be relevant to all persons in all geographic locations. The Material should not be regarded as an offer, solicitation or recommendation to buy, sell, subscribe to or invest in any securities and financial products or investments or to enter into any financial transaction. People reading the Material should consult their own professional advisers before making any investment in or decision to purchase any securities and financial products or entering into any financial transaction. To the extent permitted by applicable law, Bank of China Limited, its subsidiaries, affiliates or group companies (collectively, BOC Group ) disclaims liability for any error, omission or inaccuracy in the Material and shall not be responsible for any direct, indirect or consequential loss or damages that are incidental to or resulting from any use or reliance on the Material including any opinions expressed therein. The Material is protected by copyright. No part of it may be modified, reproduced, transmitted and distributed in any format for commercial or public use without prior written consent from Bank of China Limited London Branch and/or Bank of China (UK) Limited. 22

23 Thank you!

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