Developments in the Shanghai free-trade zone are picking up pace, with the central bank’s Shanghai office issuing long-awaited implementation details on free-trade accounts last Thursday.
The new regulation immediately allows renminbi transactions using free-trade accounts for current account business, foreign direct investment and cross-border lending, while taking a step-by-step approach towards other transaction types, which will be covered by other rules.
In essence, the latest developments reaffirm that renminbi within the trade zone will operate in a similar way to offshore renminbi, HSBC said in a research note.
The likely launch of cross-border renminbi transactions in the zone should point to greater demand for borrowing renminbi offshore and therefore add to the upward trend in US dollar-yuan forward points.
Offshore renminbi borrowing costs are still significantly lower than onshore ones. For instance, the interest rate for a loan to a primary name is around 4 percent, while the base lending rate inside China is 6 percent. So the free-trade account business is expected to attract strong demand because funds can be freely transfered between these accounts and offshore accounts.
Over time, a stronger link between offshore renminbi and the onshore market should improve offshore renminbi returns, which will make the renminbi more attractive as an investment currency.
This announcement is also part of the longer term journey of the renminbi becoming a fully convertible currency. The key implications of this are greater convergence between the onshore and offshore foreign exchange curves and stronger visibility of interest rate parity, the HSBC note said.
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