“Everyone will have access to the renminbi expressway,” said a senior official of the Shanghai office of the People’s Bank of China (PBoC).
The expressway refers to one of the latest financial developments in the Shanghai free trade zone (FTZ), the trial of “free trade accounts”.
This is part of a 30-point policy package formulated by the Chinese central bank for financial experiments in the FTZ, paving the way for banks to participate in the long-awaited renminbi cross-border flow.
Such accounts are only applicable to enterprises operating in the FTZ that meet a set of standards and prerequisites. There will be few restrictions of capital flow via these accounts.
Simply put, they can enable enterprises to leverage capital across domestic and offshore markets as their business may require. Regulators can also temporarily block the cross-linkage when necessary in order to hedge against exchange rate volatility and other risks.
A batch of major lenders including Bank of China (03988.HK, 601988.CN), Industrial and Commercial Bank of China (ICBC) (01398.HK, 601398.CN), China Construction Bank (00939.HK, 601939.CN), Shanghai Pudong Development Bank (600000.CN) and Bank of Shanghai were selected by the PBoC to operate such accounts in mid-June.
Since its inauguration last September, the FTZ has pulled in more than 10,000 enterprises with many more rushing to build their presence there.
Renminbi liberalization is without doubt among the major incentives. Figures from the Shanghai municipal government’s finance office reveal that the volume of cross-border transactions in the FTZ increased from 34.37 billion yuan (US$5.56 billion) in March to 46.27 billion yuan in April and 80 billion yuan in May.
Currently, overseas renminbi loans and two-way cross-border pooling of intra-group renminbi funds are the two pillar aspects of free trade accounts to meet the needs of enterprises in the FTZ, a PBoC Shanghai official told Southern Weekend.
Overseas renminbi loans are the most welcome breakthrough. State-owned marine cargo operator China Shipping Development (01138.HK, 600026.CN) was among the first firms that opened free trade accounts and its cross-border direct renminbi financing was conducted through ICBC branches in Shanghai and Singapore.
The process to issue such a loan, according to Shanghai official mouthpiece Jiefang Daily, is that, having received a sum of 100 million yuan from ICBC’s Singapore branch, ICBC Shanghai will then forward the amount to China Shipping Development’s free trade account as a loan. If there is a need, the company can deploy funds within the group freely.
It can, for example, apply for foreign currency purchase quotas and transfer the money to its subsidiary in Singapore. The exchange rate of the deal is set exactly at the same level of the offshore market rate.
The reform is a tight balancing act as top policymakers want to trial more liberalizing measures within the zone but the bottom line is that the nation’s financial integrity should always be secured and exchange controls maintained.
Yet, PBoC’s Shanghai office has substantial room for maneuver in specific implementation. The amount of overseas renminbi loans, for instance, is limited to no more than two times the paid-up capital of the debtor, but if there is some excessive capital inflow, the cap can be tightened to 1.5-0.5 times.
Analysts say the arrangement is a vital valve to ensure that everything is under control.
Frequent cross-boundary capital flow is seen as the biggest threat by the central bank, thus, all renminbi loans granted by overseas institutions can only be repaid after 12 months.
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