Stepping stones to freely traded renminbi

Bearing in mind this track record in Shanghai, launching new free trade zones seems a sensible step given China's sheer size.

The Guangdong free trade zone, including Qianhai, will mainly serve companies in the high-end financial services industry located in Hong Kong, Pearl River Delta and Macau. The Tianjin zone targets those located in the northern area, where some 80 Fortune 500 companies have established their presence, including many international multinational firms. Meanwhile, the Fujian zone will leverage its strength in trade with Taiwan, and in international logistics.

While the details have yet to be ironed out, the three new zones are expected to implement similar policies to Shanghai.

The Shanghai zone is likely to remain a testing ground for new initiatives, such as RMB-denominated commodity contracts, starting with crude oil futures which were approved last December. These contracts can be traded by both domestic and international investors, and should support the partial redenomination of commodity pricing quotation into renminbi.

Companies that have embraced China's liberalization via the Shanghai zone are benefitting from first-mover advantage, but the free trade zones are not without challenges. Many multinational companies feel uncomfortable with the piecemeal and unpredictable way in which China announces its policy changes. Some are reluctant to set up an entity in a free trade zone, only to find another new, more user-friendly policy around the corner.

In addition, renminbi appreciation is no longer seen as a one-way bet, posing an even bigger challenge for companies as they will have to start hedging their exposure to it.

Expansion of China's free trade zones is likely to take time. Their scale will be small compared to the broader economy and it is unlikely that the zones will have a huge impact on activities beyond their boundaries.

What is clear, though, is China is committed to driving financial reform in a bid to reach the end-game of full convertibility in the RMB, and the new free trade zones will act as stepping stones along the way.

The author is head of RMB Solutions, Standard Chartered.