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Finance & Economy

China’s free trade zone plans herald quicker FX reforms


People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, as two paramilitary police officials patrol around it in Beijing November 20, 2013

People walk past the headquarters of the People’s Bank of China (PBOC), the central bank, as two paramilitary police officials patrol around it in Beijing November 20, 2013

China plans to roll out financial sector reforms in the Shanghai special economic zone in the next three months and most will be implemented in a year, suggesting authorities are accelerating the pace of dismantling capital account controls.

A People’s Bank of China (PBOC) statement on Wednesday for the first time gave a timeline for launching deep reforms in the zone, adding they could then be duplicated in other similar zones around the country.

The statement came after the PBOC provided additional detail for its plans for financial liberalisation in the Shanghai free trade zone (FTZ) in a separate document published on Monday.

However, cross referencing the two statements does not provide a specific deadline for any one reform. It also is not clear if major reforms, such as allowing the yuan to trade freely, would be included as part of “most” of the reforms.

Still, analysts suggested the statements point to more significant action than seen in the past, especially as they follow a meeting of the Communist Party leaders in November that set a bold agenda for nationwide reform in the years to come.

“Financial reform in the pilot zone is not in the past tense, nor the future tense, but the present tense,” PBOC Shanghai chief Zhang Xin said in a statement posted on the bank’s Shanghai branch website.

The announcements have boosted investor optimism – at least temporarily – that Beijing is serious about reforms in the FTZ.

Expectations had eased off the back of a lack of detailed announcements and timelines after the zone was launched in September. The absence of major leaders at the opening event also prompted speculation the zone lacked top-level support and had become the focus of a bureaucratic turf war, and in fact state media had repeatedly warned that implementation would take time.

This caused many foreign banks and other multinationals to hold off on plans to establish subsidiaries in the zone as they awaited more details.

Chinese domestic investor enthusiasm had also waned and they have steadily sold off shares in zone-related stocks in recent weeks – some of which had risen up to 300 percent. But Wednesday’s announcement saw tickers like Shanghai Waigaoqiao Free Trade Zone Development (600648.SS) rise by the maximum daily amount of 10 percent.

Because the zone risks setting off waves of arbitrage and destabilising cross-border capital flows if it is not properly firewalled, many expected China to begin with other, less risky reform areas, like easing controls on trade in services, developing commodities futures, and reducing bureaucratic red tape.

Tracy Tian, China strategist at Bank of America Merrill Lynch, said that she was surprised regulators committed to a 12 month timetable, which she said would be “challenging.”

“Our observation is that when PBOC officials comment on (capital account opening) in speeches or articles, they tend to target 2015-2020 for national rollout.”

To address concerns about arbitrage – onshore companies finding ways to use the freedom of the zone to move funds offshore and vice versa – the central bank said it will use specially tagged bank accounts for companies and individuals in the zone. But how a company or individual will be defined as having a “presence” in the zone has yet to be published.

Dariusz Kowalcyzk, economist at Credit Agricole CIB in Hong Kong, said he was startled not only at how quickly the FTZ plans to implement reforms but also at the extent of the reforms.

He pointed out that plans to allow Chinese individuals employed by companies in the zone to freely invest in overseas assets, while at the same time opening the Chinese securities market to foreign investors in the zone, would qualify as dramatic changes impacting capital flows.

“If these are implemented in the first three months that would be shocking,” he said.

Many Chinese economists have publicly warned against opening the capital account before distortions to the domestic economy – especially interest rate controls – are eliminated.

Even many executives at foreign multinationals have said that opening the capital account is not a major priority for their companies at present, although Western governments have called for Beijing to allow the free movement of capital for years.

“Capital account reform … is not on my priority list,” said Michelle Liu, chief financial officer at German chemical maker Lanxess AG (LXSG.DE), speaking at a conference in Shanghai on Nov 27.

“In terms of yuan internationalisation, I would wish the general rules be clarified; I mostly want rules to be more transparent and stable.”

Ryan Hershberger, Asia Pacific treasurer for Ford Motor Co (F.N), speaking at the same conference, said his priority was domestic capital market liberalisation to reduce dependence on bank lending.

YUAN GLOBALISATION

The apparent tempo of reform in the FTZ is consistent with other moves by China to promote the use of its currency in global trade, including seeding offshore yuan centres in London, Paris and Singapore and allowing banks and companies to freely move the yuan across its borders for trade-related services.

While this may not be a priority for foreign treasurers, it serves other policy goals, in particular reducing foreign exchange risk for Chinese exporters and decreasing the need for China to add to its already massive foreign exchange reserves.

China’s yuan overtook the euro in October to become the second-most used currency in trade finance, data from global transaction services organisation SWIFT showed on Tuesday.

China’s share in various markets has also increased, particularly in Asia. For example, China now takes a quarter of New Zealand’s entire volume of merchandise exports, compared to a 5 percent five years ago and it is the biggest foreign direct investor in Sri Lanka.

“The size of the Chinese buying also means that the ability of the buyers to demand that payment be accepted in the yuan rather than U.S. dollars is increasing, and the product seller has needed to accommodate that change and put in place local currency facilities for product payment,” said Sean Keane, a director of Triple T Consulting and formerly a markets trader at Credit Suisse.

China now conducts nearly a fifth of its trade with the world in its own currency compared with about 1 percent at the start of 2009. That share is expected to rise to as much as a third in the next couple of years, various estimates suggest.

It has also whetted demand for Chinese assets, with the Chinese currency flirting with a record high, yuan deposits at Hong Kong banks swelling and signs of growing foreign demand for offshore assets, particularly Chinese stocks listed in Hong Kong.

Source: Reuters – China’s free trade zone plans herald quicker FX reforms
 
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About chankaiyee2

Author of the book "Tiananmen's Tremendous Achievements" about how with the help of Tiananmen Protests, talented scholars with moral integrity seized power in the Party and state and brought prosperity to China. The second edition of the book will be published within a few days to mark the 25th anniversary of Tiananmen Protests All the parts in the first edition remain in the second edition with a few changes due to information available later and better understanding. There are also some changes for improvements of style. The new parts are Chapters 12-19 on events in China after the first edition was published: The fierce power struggle for succession between reformists and conservatives; Xi Jinping winning all elders’ support during his mysterious disappearance for 2 weeks in early September, 2012; and Xi Jinping Cyclone. Chan Kai Yee's new book: SPACE ERA STRATEGY: The Way China Beats The US An eye-opening book that tells the truth how the US is losing to China. The US is losing as it adopts the outdated strategy of Air-Sea Battle while China adopts the space era strategy to pursue integrated space and air capabilities: It is losing due to its diplomacy that has given rise to Russian-Chinese alliance. US outdated strategy has enabled China to catch up and surpass the US in key weapons: Hypersonic weapons (HGV) that Pentagon regards as the weapon that will dominate the world in the future. Aerospaceplane in China’s development of space-air bomber that can engage enemy anywhere in the world within an hour and destroy an entire aircraft carrier battle group within minutes. Anti-satellite (ASAT) weapons, anti-ASAT weapons, stealth aircrafts, drones, AEW&C, etc. The book gives detailed descriptions of China’s weapon development based on information mainly from Chinese sources that the author monitors closely. U.S. Must Not Be Beaten by China! China is not a democracy. Its political system cannot prevent the emergence of a despotic leader or stop such a leader when he begins to bring disasters to people. A few decades ago, Mao Zedong, the worst tyrant in world history did emerge and bring disasters to Chinese people. He wanted to fight a nuclear war to replace capitalism with communism but could not bring nuclear holocaust to world people as China was too weak and poor at that time. If a despot like Mao Zedong emerges when China has surpassed the US in military strength, world people will suffer the misery experienced by Chinese people in Mao era. China surpassing the US in GDP is not something to worry about as China has the heavy burden to satisfy its huge population, but China surpassing the US in military strength will be world people’s greatest concern if China remains an autocracy. US people are of much better quality than Chinese people. What they lack is a wise leader to adopt the correct strategy and diplomacy and the creative ways to use its resources in developing its military capabilities. I hope that with the emergence of a great leader, the US can put an end to its decline and remain number one in the world. China, US, space era strategy, air-sea battle, space-air bomber, arms race, weapon development, chan kai yee

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