Shanghai advancing financial opening-up

Less than two weeks after French reinsurer AXA Reinsurance held an opening ceremony for its new Shanghai office, George Stansfield, deputy CEO of AXA Group, flew to the Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone to pay a visit.

Shortly after that, the company's global management team also visited Lin-gang in eastern Shanghai to conduct its first road show, the team's first trip to the area.

Stansfield quickly understood that one major advantage of Lingang is the high level of digitalization at the international reinsurance registration and trading platform, unseen anywhere else.

This has ensured that Lin-gang will grow into an insurance hub of international importance in about five years, meaning an earlier footprint here is crucial for reinsurance companies.

The international reinsurance registration and trading platform, officially launched in Lin-gang in December, has adopted blockchain technology, marking the world's first digitalized and centralized clearance system for reinsurance trading.

As of end-March, 93 insurers had gained trading permission at the platform, among which 16 were foreign-owned.

The platform indicates that China is integrated into the international risk management pool. Apart from enhancing the Chinese financial system's resilience to combat risks, it can also serve as a stabilizer for international capital in terms of cross-period asset allocation, said Wu Yiting, head of the innovative financial service center for Lin-gang administration.

Two other foreign financial institutions, Hannover Re and BNP Paribas Securities China, announced the opening of their Shanghai operations on the same day when AXA Reinsurance officially opened its Shanghai office on March 19.

According to Fook-Kong Lye, general manager of the Shanghai branch of Hannover Re, it took the company only four months, from submitting its application to obtaining approval, for starting up the new business in Lin-gang.

This came after a green light allowing foreign reinsurance companies to set up operation centers in Lingang, which was given in August. More importantly, it reflects the ongoing financial opening-up in China, in which Hannover Re has much confidence, proven by the company's huge investments, he said.

As China's fourth wholly foreign-owned securities brokerage, BNP Paribas can advance its cross-border and securities businesses in the country to address the diversified demand of both its local and offshore clients, said the company's China CEO Guo Zhiyi.

"All foreign financial institutions should keep an eye on China," he said.

As a window demonstrating China's continued opening-up, Shanghai has always been dedicated to creating a friendly environment for foreign businesses.

Shortly after BNP Paribas Securities China's official opening, Zhou Xiaoquan, executive deputy director of the Shanghai Municipal Bureau of Finance, visited the company in early May, assuring that the municipal government will provide further tailor-made services, "responding instantly to companies' requirements and making little unnecessary interference".

Shanghai will fully support foreign financial companies to set up and expand their businesses in the city, said Zhou.

In early February, the municipal government held a forum with 15 foreign financial service providers, including HSBC, BlackRock, Fidelity and American Express, soliciting their opinions on further optimizing the business environment and advancing high-level opening-up in the financial sector.

The results have been quite noticeable.

By end-2024, Shanghai was home to 1,782 licensed financial institutions, among which 30 percent were foreign-invested. About 80 percent of China's foreign asset management companies are based in Shanghai, while the ratio for foreign banks is 40 percent.

A greater presence of foreign capital is not the only goal for Shanghai.

Facilitating Chinese companies' outbound reach, and more broadly, building a two-way bridge for opening-up, is another major purpose of the Shanghai government in advancing financial opening-up.

In early April, the Shanghai branch of the Export-Import Bank of China completed foreign exchange trading business for e-commerce overseas warehousing service provider WINIT, marking its first business of the kind.

The China EXIM Bank's Shanghai branch supported WINIT's international settlement needs, including the logistics costs of its Australian warehouse.

This step forward is of much significance as the world is confronting rising protectionism in international trade and companies are facing greater pressure from rising tariffs, said the municipal government in a public circular.

In late April, Shanghai released a new action plan to improve services concerning cross-border settlements, exchange rate hedging, financing, insurance and comprehensive financial services.

Specifically, banks providing foreign exchange settlements and capital payment services to cross-border e-commerce platforms — which can be authenticated by electronic transaction data — are now allowed to provide settlement services in line with international standards for these platforms via the free trade account.

Experts from the Shanghai Municipal Financial Regulatory Bureau said this is like "an umbrella account" structure, which includes a main bank account and various subaccounts.

This structure is widely used in cross-border e-commerce. Overseas e-commerce platforms can first transfer money to the free trade account. The overseas payment company then distributes the funds to each domestic small merchant through the subaccount.

Such an "umbrella structure" was not permitted in China previously.

The latest breakthrough in Shanghai is to address the huge amount of capital on cross-border e-commerce platforms, which have sprung up rapidly over the past few years, according to officials at the Shanghai Municipal Financial Regulatory Bureau.

The action plan also supported yuan-denominated cross-border refinancing via rediscount windows. Wang Xin, head of the Research Bureau of the People's Bank of China, the country's central bank, said that this will address the financing difficulties of foreign trade companies.

Commercial banks can revitalize their domestic and overseas assets to step up support for trade companies, he said.

Another highlight in the new action plan is that banks will get support to develop deposit products for overseas institutions' free trade accounts. Under such circumstances, interest rates for nonresident deposits can refer to international practices and use market-based pricing.

In the past, the foreign currency deposit interest rates in free trade accounts was set based on China's onshore foreign currency deposit interest rates. There is a big difference with those offered in overseas markets, especially when a large number of economies have raised their interest rates over the past few years.

Banks setting up branches in the China (Shanghai) Pilot Free Trade Zone said the change in the new action plan will not only attract more foreign capital inflows, but also help to retain such capital onshore for longer periods.

In early April, Shanghai released a three-year action plan to transform and upgrade commodities trading from 2025 and 2027. In particular, spot trading and futures trading should be better coordinated so that "Shanghai pricing" can exert wider influence.

Chen Jiayuan, CEO of global agribusiness giant Louis Dreyfus North Asia, anticipated the introduction of concrete measures in this aspect, as the company will conduct new businesses based on the policy breakthroughs.

Chen Sen, head of the Shanghai reinsurance operation center for China Pacific Property Insurance, said that trading costs will be significantly lowered when trading volume at Lin-gang's international reinsurance registration and trading platform increases. This will also strengthen Shanghai's pricing power in the international reinsurance market.

The stress of "Shanghai pricing "can be largely attributed to the introduction of yuan-denominated crude oil futures.

It is China's first futures product accessible to international investors, and started trading at the Shanghai Futures Exchange in 2018. The daily trading volume of the product reached 159,400 lots in 2024, up 13.6 percent from that in 2018. Overseas institutions accounted for 20 percent of the daily trading and 40 percent of the daily holdings. Leading multinational oil companies, trade companies, investment banks, fund and asset managers have all participated in the trading of the yuan-denominated crude oil futures.

Thanks to its reasonable pricing and fairness, an increasing number of domestic and foreign companies have used yuan-denominated crude oil as the benchmark for their spot goods. The product has served as an important anchor for the pricing of crude oil and its downstream products in the spot market, said Cheng Xiaoyong, deputy general manager of the research center at Guangzhou Finance Holdings Futures.

"International oil prices have undergone drastic volatility in the past few years. The crude oil futures introduced in Shanghai has avoided forced liquidation based on its risk control system and enriched delivery methods. Market trading has been thus activated against global headwinds," he said.

Based on the success of this first attempt, five other international futures products have been introduced at the SHFE, further consolidating the idea of "Shanghai pricing".

In a forum held in late April, Chinese Vice-Premier He Lifeng said that Shanghai should calmly analyze and cope with the changes in the external market. It should better serve as an international center for renminbi asset allocation and risk management. With financial security in mind, Shanghai's role as a hub for financial opening-up should be further strengthened, he said.