Shanghai to champion financial opening-up

PBOC measures and pilot project to encourage cross-border capital flows

Foreign-invested enterprises will not be required to maintain a separate account for renminbi-denominated capital flows at a pilot project in Shanghai soon, a senior official from the People's Bank of China, the central bank, said on Thursday.

The new policy will be officially launched in the Lingang Special Area, a new addition to the Shanghai Pilot Free Trade Zone, said Jin Penghui, deputy director of the Shanghai Head Office of the PBOC.

This is one of the 30 key measures outlined by the central bank to promote financial opening-up in Shanghai. By removing the special account stipulation, the PBOC expects to spur cross-border capital flows and encourage foreign direct investment in the free trade zone, experts said.

Before the new rule, foreign-invested enterprises had to follow the administrative regulations on bank settlement accounts and open a special deposit account for the renminbi funds remitted or contributed by overseas investors. The earlier rules had also stipulated that the funds could not be used for other investments.

China will continue to facilitate the opening-up of Shanghai's Pudong New Area and the building of a global financial center in the city, said Jin.

To tackle the rising risk of "de-globalization", Beijing has been stepping up economic and financial opening-up measures and eased market access for foreign institutions.

"This means taking the vast domestic market as the mainstay, coupled with reshoring of Chinese overseas consumption, to attract foreign players to participate in the China market," said a research note from Morgan Stanley, a global investment bank.

The firm expects China's net foreign direct investment inflows to remain healthy at $40 billion to $80 billion every year between 2020 and 2030, as the country still has a competitive edge with a highly skilled labor force, well-sourced supply chain, robust infrastructure and logistics, and rising innovation.

The new measure is an indication that the authorities are keen on further liberalization of the cross-border capital flows, considering that the same is being experimented first in the Shanghai FTZ. In this regard, for example, policymakers have expanded access to the country's onshore capital markets by removing quota restrictions on the qualified foreign institutional investor and renminbi QFII plans, and through enhancements to the Bond Connect, which allows international investors increased access to the Chinese mainland's bond markets through Hong Kong.

The priority of China's approach to capital account opening is for foreign capital inflows, and then, to gradually liberalize outflows, which can also foster the international use of the renminbi, said experts.

But deeper institutional reforms are needed, said Andrew Fennel, an analyst with Fitch Ratings, a global credit ratings agency. "Without that, investors will likely harbor doubts as to whether their ability to liquidate renminbi-denominated holdings for international payment needs will remain unfettered during periods of heightened market stress."