By Saikat Chatterjee and Pete Sweeney
SHANGHAI/HONG KONG Dec 4 China plans to roll
out financial sector reforms in the Shanghai special economic
zone in the next three months and most will be implemented in a
year, suggesting authorities are accelerating the pace of
dismantling capital account controls.
A People's Bank of China (PBOC) statement on Wednesday for
the first time gave a timeline for launching deep reforms in the
zone, adding they could then be duplicated in other similar
zones around the country.
The statement came after the PBOC provided additional detail
for its plans for financial liberalisation in the Shanghai free
trade zone (FTZ) in a separate document published on Monday.
However, cross referencing the two statements does not
provide a specific deadline for any one reform. It also is not
clear if major reforms, such as allowing the yuan to trade
freely, would be included as part of "most" of the reforms.
Still, analysts suggested the statements point to more
significant action than seen in the past, especially as they
follow a meeting of the Communist Party leaders in November that
set a bold agenda for nationwide reform in the years to come.
"Financial reform in the pilot zone is not in the past
tense, nor the future tense, but the present tense," PBOC
Shanghai chief Zhang Xin said in a statement posted on the
bank's Shanghai branch website.
The announcements have boosted investor optimism - at least
temporarily - that Beijing is serious about reforms in the FTZ.
Expectations had eased off the back of a lack of detailed
announcements and timelines after the zone was launched in
September. The absence of major leaders at the opening event
also prompted speculation the zone lacked top-level support and
had become the focus of a bureaucratic turf war, and in fact
state media had repeatedly warned that implementation would take
This caused many foreign banks and other multinationals to
hold off on plans to establish subsidiaries in the zone as they
awaited more details.
Chinese domestic investor enthusiasm had also waned and they
have steadily sold off shares in zone-related stocks in recent
weeks - some of which had risen up to 300 percent. But
Wednesday's announcement saw tickers like Shanghai Waigaoqiao
Free Trade Zone Development rise by the maximum
daily amount of 10 percent.
Because the zone risks setting off waves of arbitrage and
destabilising cross-border capital flows if it is not properly
firewalled, many expected China to begin with other, less risky
reform areas, like easing controls on trade in services,
developing commodities futures, and reducing bureaucratic red
Tracy Tian, China strategist at Bank of America Merrill
Lynch, said that she was surprised regulators committed to a 12
month timetable, which she said would be "challenging."
"Our observation is that when PBOC officials comment on
(capital account opening) in speeches or articles, they tend to
target 2015-2020 for national rollout."
To address concerns about arbitrage - onshore companies
finding ways to use the freedom of the zone to move funds
offshore and vice versa - the central bank said it will use
specially tagged bank accounts for companies and individuals in
the zone. But how a company or individual will be defined as
having a "presence" in the zone has yet to be published.
Dariusz Kowalcyzk, economist at Credit Agricole CIB in Hong
Kong, said he was startled not only at how quickly the FTZ plans
to implement reforms but also at the extent of the reforms.
He pointed out that plans to allow Chinese individuals
employed by companies in the zone to freely invest in overseas
assets, while at the same time opening the Chinese securities
market to foreign investors in the zone, would qualify as
dramatic changes impacting capital flows.
"If these are implemented in the first three months that
would be shocking," he said.
Many Chinese economists have publicly warned against opening
the capital account before distortions to the domestic economy -
especially interest rate controls - are eliminated.
Even many executives at foreign multinationals have said
that opening the capital account is not a major priority for
their companies at present, although Western governments have
called for Beijing to allow the free movement of capital for
"Capital account reform ... is not on my priority list,"
said Michelle Liu, chief financial officer at German chemical
maker Lanxess AG, speaking at a conference in Shanghai
on Nov 27.
"In terms of yuan internationalisation, I would wish the
general rules be clarified; I mostly want rules to be more
transparent and stable."
Ryan Hershberger, Asia Pacific treasurer for Ford Motor Co
, speaking at the same conference, said his priority was
domestic capital market liberalisation to reduce dependence on
The apparent tempo of reform in the FTZ is consistent with
other moves by China to promote the use of its currency in
global trade, including seeding offshore yuan centres in London,
Paris and Singapore and allowing banks and companies to freely
move the yuan across its borders for trade-related services.
While this may not be a priority for foreign treasurers, it
serves other policy goals, in particular reducing foreign
exchange risk for Chinese exporters and decreasing the need for
China to add to its already massive foreign exchange reserves.
China's yuan overtook the euro in October to become the
second-most used currency in trade finance, data from global
transaction services organisation SWIFT showed on Tuesday.
China's share in various markets has also increased,
particularly in Asia. For example, China now takes a quarter of
New Zealand's entire volume of merchandise exports, compared to
a 5 percent five years ago and it is the biggest foreign direct
investor in Sri Lanka.
"The size of the Chinese buying also means that the ability
of the buyers to demand that payment be accepted in the yuan
rather than U.S. dollars is increasing, and the product seller
has needed to accommodate that change and put in place local
currency facilities for product payment," said Sean Keane, a
director of Triple T Consulting and formerly a markets trader at
China now conducts nearly a fifth of its trade with the
world in its own currency compared with about 1 percent at the
start of 2009. That share is expected to rise to as much as a
third in the next couple of years, various estimates suggest.
It has also whetted demand for Chinese assets, with the
Chinese currency flirting with a record high, yuan deposits at
Hong Kong banks swelling and signs of growing foreign demand for
offshore assets, particularly Chinese stocks listed in Hong