Reuters: Regulatory News: UPDATE 2-China opens new trade zone in Shanghai, reform plans unveiled

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UPDATE 2-China opens new trade zone in Shanghai, reform plans unveiled Sep 29th 2013, 12:34 Sun Sep 29, 2013 8:34am EDT * Restrictions lifted on individual cross-border investment * Loan-to-deposit ratios, other regs on banks to be eased * Intl oil futures trading platform planned * Deeper reforms subject to risk control implementation - c.banker SHANGHAI, Sept 29 (Reuters) - China opened a new free trade zone in Shanghai on Sunday in what has been hailed as potentially the boldest reform move in decades, and gave fresh details on plans to liberalise regulations governing finance, investment and trade in the zone. The Shanghai FTZ, which covers an area of nearly 29 sq km on the eastern outskirts of the commercial hub, was approved by China's State Council, or cabinet, in July. State-run Xinhua news agency quoted Commerce Minister Gao Hucheng as saying that the creation of the FTZ was a crucial decision for China's next wave of reform and opening-up. "It follows the tendency of global economic developments and reflects a more active strategy of opening-up," Gao said at the launch ceremony. The State Council said on Friday it would open up its largely sheltered services sector to foreign competition in the zone and use it as a test bed for bold financial reforms, including a convertible yuan and liberalised interest rates. Economists consider both areas key levers for restructuring the world's second-largest economy and putting it on a more sustainable growth path. Some Chinese and foreign firms have already moved to set up subsidiaries in the zone. A total of 25 companies so far have been approved to set up operations in a variety of sectors, alongside 11 financial institutions, most of which are domestic banks but including the mainland subsidiaries of Citibank and DBS. Ralph Haupter, corporate vice president of Microsoft Corp , speaking on the sidelines of the opening ceremony, said Microsoft was excited about the zone's potential. "Details and sizes of business are hard to predict at this stage. But business is continuously growing and the entertainment business is very important for us at Microsoft." HIGH HOPES, OR NOT? Some have trumpeted the FTZ, which integrates three existing zones, as comparable to Deng Xiaoping's creation of a similar zone in Shenzhen in 1978. Many credited that move as being crucial to China's economy opening up to foreign trade and investment. Optimism among mainland investors that the zone will at very least attract fresh investment and engender a wave of fresh infrastructure spending has sent property prices and FTZ-related stocks soaring in recent weeks. Sceptics, however, point to a similar scheme launched near Shenzhen, in Qianhai, last year, but that has so far failed to live up to expectations. Qianhai was presented as place for radical experimentation with China's capital account. Analysts and economists say that the plans for Shanghai, at least, are more specific and ambitious. For example, one major planned change officials described on Sunday will be in the regulations governing how foreign and Chinese individuals can invest across borders. Previously foreign and Chinese investors were only allowed to invest across the border by buying into funds regulated through either the Qualified Foreign Institutional Investor (QFII) programme or the Qualified Domestic Institutional Investor (QDII) programme, both of which are restricted by quotas. But Dai Haibo, deputy director of the zone administrative committee, said on Sunday that this requirement would be waived for foreign and Chinese individuals within the zone, who will be allowed to invest funds directly for the first time. He did not say whether they would also be subject to a quota. He also said that foreign banks in the zone would be allowed to issue bonds in the domestic market. Officials also said that China would develop an international oil futures trading platform in the zone and encourage foreign participation, part of attempts to upgrade commodities markets and hedge risk in the world's largest energy consumer. The insurance regulator added on Sunday that it would support allowing foreign health insurance providers to operate in the zone and would also back the development of yuan-denominated cross-border reinsurance, among other reforms. REGULATORY REQUIREMENTS FOR FOREIGN BANKS Regulations of Chinese and foreign banks will also be eased, said Liao Min, head of the Shanghai branch of the China Banking Regulatory Commission (CBRC), adding the CBRC will adjust loan-to-deposit ratios and other regulatory requirements for banks in the zone. He said that the government would consider easing regulatory requirements for foreign banks when they apply to upgrade representative offices to full-fledged branches in the zone, and it would accelerate the application process for foreign banks applying for yuan settlement licences. Both functions are key for foreign banks seeking to do business in China, and the slow pace of approval has been a subject of frequent complaints from foreign bankers. Given the mixed history of other capital account reform projects and the current speculative environment, regulators have been signalling caution in recent weeks. For example, while the project is widely considered to be a pet programme of Premier Li Keqiang, Li did not attend the opening ceremony, nor did the heads of the central bank or the foreign exchange regulator. The highest ranking official from the central government was Commerce Minister Gao. State media have run commentaries warning against undue property speculation, and have said that the most dramatic reforms were unlikely to be enacted this year. "All reforms to interest rate and exchange rate systems will be based on the premise of risk control," Zhang Xin, head of the Shanghai branch of the People's Bank of China, told a press conference on Sunday. There is also significant scepticism that Beijing will be able to implement profound financial adjustments within the zone without letting them spill out into the rest of the country, and numerous high profile academics and officials have argued publicly against implementing them in this way. In addition, there have been reports of bureaucratic turf wars over which agency will drive financial reform. The zone proposes to test new policy environments for 18 different industries, ordinarily regulated by different bureaucracies, some with overlapping mandates and conflicting agendas. Liao Qun, China chief economist at Citic Bank International, said the tone of the master planning document remains cautious given the challenges. "Liberalisation may not be realised all at once." Link this Share this Digg this Email Reprints

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