* 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 -
By Gabriel Wildau and Pete Sweeney
SHANGHAI, Sept 29 China opened a new free trade
zone in Shanghai on Sunday in what has been hailed as
potentially the boldest reform in decades, and gave fresh
details on plans to liberalise regulations governing finance,
investment and trade in the area.
Officials gave no details on when specific initiatives will
be implemented but the government has said most will be
introduced in the next three years.
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 trend of global economic developments and
reflects a more active strategy of opening-up," Gao said at the
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 are already setting up
subsidiaries in the zone.
A total of 25 companies so far have been approved to start
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."
A Xinhua report quoted a document from China's Ministry of
Culture saying the ministry would remove a 13-year old ban on
video game console manufacture and sale for companies registered
in the zone, provided the products were approved.
"Foreign game machine manufacturers will be eligible to sell
their products in China, merely via their entities registered in
the zone," the report said.
HIGH HOPES, OR NOT?
Some have compared the FTZ, which integrates three existing
zones, to Deng Xiaoping's creation of a similar zone in Shenzhen
in 1978 which was crucial to China's economy opening up to
foreign trade and investment.
Optimism among mainland investors that the zone will trigger
fresh investment and infrastructure spending has sent property
prices and FTZ-related stocks soaring in recent weeks.
Sceptics point to a similar scheme launched last year near
Shenzhen, in Qianhai, that so far has failed to meet
But analysts and economists say that the Shanghai plan is
more ambitious and specific, such as in regulations on how
foreign and Chinese individuals can invest across borders.
Foreign and Chinese investors have only been allowed to
invest cross-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 foreigners and Chinese in the zone
would 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 said 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 related
to cross-border financing for banks in the zone.
Cross-border financing could potentially drastically reduce
funding costs for Chinese firms and expose domestic banks to
more foreign competition, but would also provide Chinese banks
an outlet to find new clients overseas.
Liao 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.
The project is widely considered to be a pet programme of
Premier Li Keqiang but he did not attend the opening ceremony.
The heads of the central bank and the foreign exchange regulator
were also absent.
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.
Experts also doubt Beijing will be able to implement major
changes in the zone without them spilling over into the rest of
the country. Numerous high profile academics and officials have
argued publicly against introducing them in this way.
There have also been reports of bureaucratic turf wars over
which agency will drive financial reform.
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."
Foreign investors continue to await the publication of a
"negative list" of banned investment targets and industries.
In the past foreign investors were put off by vague
explanations of what industries could be invested in and what
remained off limits. The negative list concept would allow free
foreign investment in any industry not specifically on the list.
Shanghai government officials told Reuters the list would be
published at some point on Sunday. Reuters was unable to find
such a list on any major government website at time of