China clarifies steps to get yuan cross-border business moving in Shanghai pilot

HONG KONG Fri Feb 21, 2014 2:19am EST

HONG KONG Feb 21 (Reuters) - China's central bank has clarified operational details for conducting cross-border business in the yuan currency through its pilot project in the Shanghai free trade zone, according to a circular seen by Reuters on Friday.

The circular to the banks was released by the Shanghai head office of the People's Bank of China (PBOC), and marked a significant step in Beijing's goal to internationalise the use of the yuan, a move that could rival the U.S. dollar as the preferred currency in global business transactions.

The details sent out on Thursday is generally in line with the Opinions on the Developments of China (Shanghai) Free Trade Zone released in December, but they included operational rules on how banks can conduct yuan business.

China launched the Shanghai free trade zone in late September and officials promised a far more open and streamlined environment for foreign firms to do business there, along with the relaxation of policies for a raft of service sectors.

It forms part of a broader drive to help expand the Chinese currency's footprint beyond Hong Kong, where more than 80 percent of yuan trade settlement transactions are handled and foster greater confidence among offshore businesses to adopt the yuan, also known as the renminbi, as a currency for trade.

Beijing's efforts have paid dividends, with the yuan already overtaking the euro to become the second-most used currency in trade finance, data from global transaction services organisation SWIFT showed.

According to the circular, banks in Shanghai are allowed to do cross-border renminbi settlement under the current account and for direct investment on the basis of "know your client", "know your business" and "due diligence."

This means that lenders can decide whether to arrange such transactions for their clients independently, without having to seek approval from regulators.

The notice also unveiled formulas to calculate how much companies and financial institutions in the zone can borrow in renminbi from offshore markets and where the funds can be used.

In terms of cross-border, two-way renminbi pooling and sweeping, members within a corporate group are allowed to do non-quota based transactions without the central bank's sign-off.

The move enables greater visibility, control and flexibility in managing a group's onshore and offshore renminbi-denominated cash flows.

Following the notice, Standard Chartered Bank announced on Thursday that it had approved the first such transaction for Baoxin Auto Group, an automobile sales and service group focused on high-end automobile brands.

Fund transfers from Baoxin Group's participating subsidiaries into the cash pools inside and outside the free trade zone can be initiated through its free trade zone office without quotas or central bank approval.

A batch of banks including Deutsche Bank DBKGn.DE, Citibank, DBS, Hang Seng Bank, HSBC and Bank of East Asia have received approvals to start operations in the pilot zone.

The circular also said China Foreign Exchange Trading System & National Interbank Funding Center (CFETS), will provide service of financial asset transactions denominated in the Chinese currency to investors in the pilot zone and offshore markets. The CFETS is an arm of the PBOC, whose core functions include providing trading and benchmark facilities.

Shanghai Gold Exchange will also make efforts to promote the wider use of the renminbi in international precious metal markets by offering precious metal transactions and settlements in the Chinese currency in the free trade zone.

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