After a long wait, the People’s Bank of China late last week issued two sets of rules on how trade accounts will function within the Shanghai Free Trade Zone. The rules were effective immediately but companies hoping to do business, or move money, between the mainland and the FTZ might have a few more questions for regulators.
The new rules allow for several types of renminbi transactions such as foreign direct investment and lending between the zone and the rest of the world. They specified how accounts for foreign firms, or non-resident accounts, would interact with the resident accounts of Chinese companies.
This is good news for firms that plan to do business contained within the zone. China is set to open new areas of business such as cloud computing and e-commerce to foreign companies. Those businesses should be able to begin moving capital into the zone to fund operations.
Despite the latest installment to the growing list of documents regulating the zone, overall sentiment is down on the financial experiment, which was announced last July and believed to be the pet project of Premier Li Keqiang, China’s No. 2 in charge of the economy.
After the central bank issued 30 theoretical points on the trade accounts last December, it said a follow-up on the implementation of the accounts would come within three months. The wait was almost twice as long as originally expected. And, crucially, the announcement last week was missing guidelines on how capital will move from the zone onto the mainland.
“[The lack of those details] disappointed the market the most,” said Li Yimin, an analyst at SWS Research in Shanghai.
The notice in December pointed to a channel for moving renminbi from the zone onto the mainland, as well as channels for investing capital from the zone into mainland equity markets.
But those waiting for rules that will allow businesses to move capital inward or arbitrage on exchange rates between onshore yuan and offshore yuan will likely continue to be disappointed with the release of each new piece set of rules, Li said.
At this stage, renminbi in the zone will be treated like offshore yuan, which trades at a different rate in places such as Hong Kong and London compared to onshore yuan. Within the next six months, the People’s Bank will consider allowing transactions in other currencies depending on the success of the current regulations.
Freeing up the movement of capital between the zone and the mainland is a matter of overall financial reform. Opening that channel is akin to prying open China’s capital account, a step in the reform process that’s still far off. Several other reforms such as foreign exchange and interest rate liberalization may need to happen before regulators will consider opening a channel between the zone and the mainland.
“This is going to be a long process,” Li said.