Shanghai Pilot FTZ: two key financial rules in place
06 June 2014
On 22 May the Shanghai Head Office of the People’s Bank of China (PBOC Shanghai) issued the China (Shanghai) Pilot Free Trade Zone Separate Accounting Business Implementing Rules (Trial Implementation) (the Implementing Rules) and the China (Shanghai) Pilot Free Trade Zone Prudential Risk Management Detailed Rules (Trial Implementation) (the Prudential Management Rules). These two sets of rules are seen as the very core of PBOC’s financial support for the Shanghai Pilot Free Trade Zone (FTZ).
Salient points of the Implementing Rules include:
(i) By creating separate accounting units, financial institutions in Shanghai may provide entities in the FTZ -- which have set up free trade accounts -- with financial services in connection with current items, direct investments and innovative investment and financing facilities under the so-called PBOC 30-point guideline. They are also allowed to provide foreign institutions related financial services in accordance with the pre-establishment national treatment principle.
(ii) It is clarified that free trade accounts are dual currency -- Renminbi and foreign --bank accounts with unified administration rules and such accounts can be set up by resident entities as well as foreign institutions as needed.
(iii) Fund transfers between free trade accounts and overseas accounts, non-resident institution accounts in the Chinese mainland but outside the FTZ as well as other free trade accounts will be administrated under macro-prudential principles. Fund transfers between free trade accounts and other bank accounts in the mainland (including the FTZ) will be administrated strictly under limited infiltration principles as if they were cross-border businesses. Fund transfers between the free trade account of a non-financial institution and its ordinary accounts will be handled according to the four channels stipulated by the Implementing Rules.
(iv) The Implementing Rules have refined the specific policy arrangements for foreign exchange conversions of funds in free trade accounts. For businesses that have already realised direct conversions (including those related to current items and direct investments), the funds within the free trade accounts are free to convert.
(v) Upon approval, institutions such as China Foreign Exchange Trading System and Shanghai Clearing House may offer both within the FTZ and overseas various types of services in cross-border financial transactions, clearing and settlement.
The Prudential Management Rules have established risk warning and handling mechanisms and PBOC Shanghai will carry out off-site monitoring. Should there be any unusual movement of funds, it will implement intervention measures based on different warning indicators such as extending the deposit period of accounts, levying special deposit reserves, paying zero interest on deposit reserves or instituting temporary capital controls in order that financial operations within the FTZ can be run under sound conditions.
Zhang Xin, deputy director of PBOC Shanghai, president of PBOC Shanghai Branch and head of the State Administration of Foreign Exchange Shanghai Branch, explains that the issuing of these two sets of rules means that all of PBOC’s financial support measures for the FTZ have basically been put in place.
Last December, PBOC issued a 30-point guideline pledging financial support to the FTZ. But because of a lack of specific rules, at that time, many practical operations could not be carried out. In February this year, PBOC Shanghai had successively issued five sets of detailed rules for the FTZ, namely on cross-border Renminbi payment services, expansion of cross-border use of Renminbi, lifting the caps on interest rates on small-amount foreign currency deposits, foreign exchange management, and anti-money laundering and anti-terrorism financing.
Zhang says that the rolling out of these two sets of rules signifies that the policy framework under the PBOC 30-point guideline that is conducive to the risk management of account systems has essentially taken shape, thus providing tools and carriers for financial reforms in pilot capital account convertibility projects in the FTZ.
He explains that the two sets of rules now issued together establish an accounts system framework within the FTZ that is conducive to risk management and will provide a foundation for the development of innovative businesses in investments, financing and foreign exchange in the FTZ. With the release of these two sets of rules, entities in the FTZ can make use of their free trade account as a carrier to embark on innovative businesses in investments, financing and foreign exchange. Under the general principle of “introducing new measures once they are ready”, implementation measures will be further developed for actively and steadily carrying out experiments such as personal cross-border investment, capital market liberalisation and cross-border financing facilitation. The goal is to better optimise business environment in the FTZ and satisfy the demand of the real economy for financial services.
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