“It’s now official,” HSBC analysts called out at the beginning of the month. “Beijing is accelerating the pace of [renminbi] convertibility.”
Indeed, the People’s Bank of China (PBOC) on December 2 issued a 30-point opinion on reforms that could be implemented in Shanghai’s free trade zone (FTZ). A hubbub of commentary followed, calling it a major announcement; the statement from the central bank also brightened analysts’ eyes on the prospect for speedier liberalization of the country’s capital account.
The opinion was a step forward, but a baby step at best. It provided some clarity on how money will move – or not move – in and out of the zone. But it says little about liberalizing the yuan. Characteristically, the timeframe for real action is all but unclear.
Chinese nationals registered in the zone can open resident accounts. Foreigners will be allowed to open non-resident accounts. Transactions between the two will be free.
Transactions between accounts within the zone and those on the outside will be treated as cross-border money flows. There will be some flexibility for Chinese who move money from the zone to an offshore account. Foreigners may be given the same treatment when processing a transaction between the zone and the mainland. Non-financial Chinese companies may also have some flexibility in moving money to accounts on the mainland.
However, easier transactions between these accounts do not mean the yuan can be freely converted when moving money. The PBOC has held off on that step, saying only that free convertibility between accounts and between the zone and the mainland will happen when “conditions are mature.”
That means free convertibility will come only when regulators can bear to cede some control over the renmimbi. Prying the State Administration of Foreign Exchange’s notoriously tight grip from currency controls will prove more difficult than many assume.
When it comes to exchanging currency, the walls between the FTZ and the mainland will remain as thick as the border with Hong Kong.
“I don’t think they will blur the line between the accounts inside the zone and outside the zone,” Yang Tiecheng, a Beijing-based foreign legal consultant at UK law firm Clifford Chance, said in an interview last week. Yang compared the likely conditions for exchange between the FTZ and the mainland to those between Hong Kong and the mainland today. “In my view, [the PBOC opinion is] a step forward, no doubt about that. But how significant is this step? I would suggest waiting for the detailed rules.”
The details still escape investors. Government lists, opinions and an exceedingly rough timeframe have surfaced but no comprehensive document has laid down the law in lucid terms.
Beijing put out a “negative list” in October which specified what cannot be done in the zone. Shanghai’s party chief has pledged to pull some items from it. Both China’s securities and banking regulators have issued opinions on the zone. PBOC’s came last due to the sensitivity of cash flows.
The timeframe is overly basic: Within one year, many of the proposed measures will be introduced. Even officials are not exactly clear on how things will work. Shanghai’s vice mayor responsible for the zone, Ai Baojun, said last week that the FTZ will be in an experimental phase for two to three years.
Analysts and experts who spoke with China Economic Review agreed that, within three years, it is possible regulators could drop all controls on convertibility in the zone. When that happens, investors will know that the zone has gained the support it needs to fulfill the grand financial ambitions foisted upon it.