Shanghai Free-trade Zone to lead on yuan reform

Beijing agrees to allow city´s free-trade zone to pioneer wider convertibility of the currency and freer market-oriented interest rates

The central government sees Shanghai´s free-trade zone, to be launched this month, as the pioneer on the mainland of wider convertibility of the yuan and freer, market-oriented interest rates.

Beijing has in principle agreed to let the zone, the mainland´s first, take the lead in its long-awaited reform of foreign exchange and interest rates, an internal government document about the zone´s launch shows.

It also highlighted the importance of keeping potential financial risks under control.

"On the condition risks can be controlled, [firms] can undertake convertibility of the yuan on the capital account on a first-to-do and first-to-try basis within the zone," said the Chinese-language document, obtained by the South China Morning Post yesterday.

The yuan is already convertible for trade but Beijing still imposes restrictions on its convertibility on the capital account, mainly because of concerns that excessive money inflows and outflows could threaten the growth of the economy.

The document did not say whether the government would allow full convertibility of the yuan on the capital account. It remained cautious about the potential risks of greater convertibility, even within the zone.

The free-trade zone in Shanghai "can also realise market-oriented financial market rates. Pricing can be done by financial institutions based on market needs", the document said.

The government would also allow firms wider use of the yuan in cross-border business "on a first-to-do and first-to-try basis within the zone", it said.

Liu Ligang, the chief economist at ANZ Hong Kong, said: "We believe Shanghai plans to replicate another Hong Kong through the free-trade zone. Many companies may choose to move their principal business activities currently in Hong Kong. In addition, the proximity to Shanghai´s main market may expand the volume of cross-border flows."

The plan to allow Shanghai to take the lead in testing wider convertibility of the yuan may also put Shenzhen´s special economic zone in Qianhai - promoted earlier as a testing ground for yuan globalisation - in the shade, analysts say.

It is understood that Premier Li Keqiang endorsed the plan to launch the free-trade zone in Shanghai rather than in Tianjin or Guangdong, which had also lobbied for the central government´s approval. Qianhai´s role has been endorsed by central bank governor Zhou Xiaochuan.

Last month, Beijing gave approval for Shanghai´s free-trade zone, which will span almost 29 square kilometres in the Pudong New Area, including the Waigaoqiao duty-free zone and Yangshan port.

The Post reported yesterday the zone might eventually be expanded to cover the entire 1,210 square kilometre Pudong district if it proves to be a success.

SOURCE: SOUTH CHINA MORNING POST