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Central Bank Lends Support to Financial Reforms in FTZs

The People’s Bank of China (PBOC) has recently issued guiding opinions on financial reforms supporting the development of the free trade zones (FTZs) in Tianjin, Guangdong and Fujian, according to which trade and investment facilitation, renminbi capital account convertibility within the limits, macro-prudential management of external debt, and renminbi and foreign currency derivatives will be implemented in the FTZs.

Following close on the heels of similar guidelines announced by the Shanghai FTZ, the PBOC financial reform guiding opinions issued on 11 December 2015 stated that Class A enterprises under the trade in goods foreign exchange management category in the FTZs are not required to open a verification account for trade in goods revenue but given a choice to deal with the current account to purchase foreign exchange and payment in advance by different banks with the aim to promote trade and investment facilitation and further simplify the process on the basis of real legal transactions. Procedures for direct investment-related foreign exchange registration, which are to be delegated to banks, will be simplified. Foreign lending administration over institutions in the FTZs will be relaxed to further increase the proportion of foreign lending. Eligible financial leasing businesses in the FTZs are allowed to receive rent in foreign currency.

Domestic institutions registered in the FTZs and (engaged in businesses) outside of the negative list will be free to carry out cross-border investment and financing activities, the cap of which has been set for cross-border revenue and cross-border expenditure of each institution on a yearly basis (an equivalence of US$10 million provisionally, to be adjusted according to the macroeconomic and international balance of payments situations). Free foreign exchange settlement within bounds will be implemented. Eligible institutions in the FTZs should open the capital account (investment and financing account) in the local banking institutions in the jurisdiction of the foreign exchange branch of the pilot FTZs to deal with related convertible businesses within bounds.

In macro-prudential management of external debt, institutions in the three FTZs can borrow external debt adopting the proportional self-discipline management, allowing local organisations to borrow external debt within the limit of a certain multiple of net assets (tentatively one time, to be adjusted according to the macroeconomic and international balance of payments situations). Intentional exchange settlement of corporate external debt funds will be implemented.

It is understood that the external debt self-discipline management policy of Shanghai FTZ is slightly different, which provides for a higher external debt balance scale, at two times of net assets.

Allowing foreign institutions to offer renminbi and foreign currency derivatives trading is also an important feature of the reforms.

China’s central bank earlier stated in a document that domestic banks can only offer renminbi and foreign currency derivatives on behalf of domestic institutions and individuals, not including foreign institutions so that domestic renminbi exchange rate would not be affected by foreign institutions’ manipulation.

However, considering the risk separation measures inside and outside of the FTZs, the central bank now gives support to banking institutions registered in the three FTZs to deal in renminbi and foreign exchange derivatives trading on behalf of foreign institutions carrying out spot foreign exchange transactions business in accordance with regulations, and have that integrated into the banking exchange settlement position sizing.

Content provided by Picture: HKTDC Research
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