On December 2, 2013, the People’s Bank of China (“PBOC”) has issued the Opinions on the Financial Support for the Building of the China (Shanghai) Pilot Free Trade Zone (the “Opinions”, in Chinese: 中国人民银行关于金融机构支持中国（上海）自由贸易试验区建设的意见).
According to the Opinions, the PBOC will basically support the development of the China (Shanghai) Pilot Free Trade Zone (“Shanghai FTZ”) in five focus areas along with detailed measures:
- Innovation in the bank account system
- Facilitation of foreign exchange conversion in investment and financing
- Expansion of cross-border use of RMB
- Acceleration of interest rate liberalization
- Deeper reform of foreign exchange administration
A. Innovation in the bank account system
- Resident enterprises in the pilot zone can set up RMB and foreign currency free trade accounts to enable separate management of bank accounts and facilitate innovative investment and financing activities. Non-resident enterprises can set up RMB and foreign currency non-resident free trade accounts in the banks located in the pilot zone and enjoy the relevant financial services previously only available to domestic enterprises.
- Funds can be freely transferred between the resident free trade accounts and the following accounts: offshore accounts, non-resident accounts located within China but outside the pilot zone, non-resident free trade accounts and other resident free trade accounts.
- Fund transfers between resident free trade accounts and other bank settlement accounts of the same non-financial institution are allowed in cases of current account transactions, loan repayments, investments or other qualified cross-border transactions.
B. Facilitation of foreign exchange conversion in investment and financing
- Qualified Chinese individuals who are working in the Shanghai FTZ will be allowed, in accordance with relevant rules, to invest in overseas securities market and transfer their after-tax income earned within the Shanghai FTZ to offshore accounts. Similarly, qualified foreign individuals who are working in the Shanghai FTZ can open non-resident individual domestic investment account to, in accordance with relevant rules, make investment in China including securities investment.
- Qualified companies in the Shanghai FTZ will be allowed to directly invest in overseas capital markets including the derivative markets in accordance with relevant rules. Financial institutions and companies in the Shanghai FTZ will be allowed to invest in the city of Shanghai’s securities market, in accordance with relevant rules.
C. Expansion of cross-border use of RMB
- Commercial banks in the Shanghai area can directly process cross-border RMB settlement related to current accounts and direct investment transactions upon customers’ instructions, on the basis of “know your customer”; “know your business” and “due diligence review” principles, unless the instructing entity is on the “export trading RMB settlement entities watch list”. This reform aims to promote the usage of cross-border RMB in both investment and trade settlement by adopting a macro supervision system.
- Enterprises in the pilot zone can conduct mutual cash pooling business and centralized collection and payment for current account transactions with affiliated companies.
D. Acceleration of interest rate liberalization
- The financial institutions meeting the relevant conditions in the Pilot Zone shall be included into the scope of the entities who may issue negotiable certificates with large-amount deposits in priority, and the pilot issuance of negotiable certificates with large-amount deposits shall be realized in the Pilot Zone.
- When the conditions are met, the upper limit on interest rates of small-amount deposits in foreign currencies under common accounts in the Pilot Zone shall be relaxed.
E. Deeper reform of foreign exchange administration
- Simplify the procedures for foreign exchange registration of direct investment. the procedures for foreign exchange registration and change registration under direct investment shall be delegated to banks for processing, and the subsequent regulation will be strengthened. The foreign exchange funds under direct investment in the Pilot Zone may be settled at will.
- Support the Pilot Zone to carry out overseas lease service. The examination and approval transaction by transaction for the overseas creditors’ rights business of financial lease companies such as overseas lease shall be cancelled, and the registration administration shall be implemented. Upon approval, the financial lease companies and Chinese financing lease companies are permitted to charge rentals in foreign currencies for domestic financing lease, and the procedures for prepayment for large financing lease projects such as lease of aircrafts and vessels shall be simplified.
- The approval upon payment of guarantee fees by the entities in the Pilot Zone to overseas entities shall be cancelled, and the entities in the Pilot Zone may directly handle the procedures with the banks for purchase of foreign exchange and payment of the guarantee fees.
Sheppard Mullin Observations
The Opinion by PBOC is one of the detailed descriptions of the previous Overall Plan for China (Shanghai) Pilot Free Zone” issued by the State Council on September 27. The purpose of the Opinion is to serve the real economy and facilitate cross-border investment and trading, while at the same time managing the risks.
However, the Opinion did not specify a timetable or any deadline for implementation. It is worth noting that after the Opinions were released, Vice Chairman of PBOC Shanghai branch, Zhang Xin informally gave a preliminary schedule to media, “ most of the policy initiatives are expected to be implemented within the next three months; the implementing rules shall be subject to test and exploration for about half a year to gain more experiences; and if the experiments work, the authorities expect to establish, a financial administration model that is copyable and extendable to other regions of China within one year.”
That means more financial reform is just beginning in the present tense.