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Shanghai FTZ Releases Regulatory Plan to Better Monitor Cross-Border Capital Flows

The Shanghai Free Trade Zone plans to build a cross-border financial safety net based on the free trade account system to strengthen the instant and dynamic monitoring and control of cross-border capital flows in domestic and foreign currency and establish a sound “long-arm management” mechanism.

The Shanghai Municipal Government recently released the Overall Plan for Further Deepening the Building of the System of Operational and Post-Operational Oversight for the China (Shanghai) Pilot Free Trade Zone and the Pudong New Area, which proposed to establish a joint financial oversight mechanism catering to the needs of the development of the Shanghai Free Trade Zone and the building of Shanghai as an international financial centre.

On the so-called “long-arm management” mechanism, head of the policy research bureau of the Shanghai Free Trade Zone Management Committee Zhang Yong said it means extending the management of funds after they left the country to prevent arbitrage or money laundering in the name of outbound investment.

The Overall Plan also puts forward the proposal to implement the “three principles of business development” for commercial banks and give scope to their role in monitoring and controlling cross-border capital flows.

Zhang Xin, deputy director of the Shanghai headquarters of the People’s Bank of China and head of the Shanghai branch of the bank, said at the “two sessions” (municipal people’s congress and municipal committee of the CPPCC) held in Shanghai at the beginning of this year that the Shanghai Free Trade Zone has established an information system on the monitoring and execution of cross-border capital flows with free trade accounts at the core. Based on this system, the regulatory departments can carry out real-time monitoring of cross-border capital flows “transaction by transaction seven days a week and 24 hours a day”.

This “ring fencing” function of this system can automatically calculate the maximum funds to be raised by an enterprise offshore and raise alarm if it exceeds the limit. It can also raise macroscopic early warning and ascertain the total value of cross-border capital inflows and outflows on a macroscopic level besides playing a strong role in “anti-money laundering and counter-terrorist financing”.

Over 40 financial institutions in the Shanghai Free Trade Zone have access to the free trade account system and more than 50,000 free trade accounts have been opened.

At present, attention paid to cross-border capital flows mainly focuses on outbound investment.

China’s outbound direct investment has exceeded foreign investment in actual use since February 2016. Its outbound direct investment was US$29.92 billion while its foreign investment in actual use was US$22.52 billion in January and February this year, with outbound direct investment exceeding foreign investment in actual use by US$7.4 billion. The gap widened in the subsequent months to reach US$19.44 billion by the end of June.

China’s total non-financial outbound direct investment was US$88.86 billion in the first half of this year, up 58.7% year-on-year. Its outbound investment in 2015 was US$118 billion.

The practice of record filing for the outbound investment of enterprises since the establishment of the Shanghai Free Trade Zone has facilitated enterprises in their outbound investment and further increased their competitiveness in offshore acquisitions and mergers.

Outbound investment by enterprises in the Shanghai Free Trade Zone has multiplied in the last three years. According to the records filed, China’s outbound investment soared from US$329 million in 2013 to US$22.918 billion in 2015.

For details of the Overall Plan in Chinese, please see: http://www.shanghai.gov.cn/nw2/nw2314/nw2319/nw12344/u26aw48434.html

Content provided by Picture: HKTDC Research
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