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 A People's Bank of China 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 liberalization 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 time.
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 <600648.SS> rise by the maximum daily amount of 10
percent.
Because the zone risks setting off waves of arbitrage and
destabilizing 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 tape.
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.
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"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 years.
"Capital account reform ... is not on my priority list," said
Michelle Liu, chief financial officer at German chemical maker
Lanxess AG <LXSG.DE>, speaking at a conference in Shanghai on Nov
27.
"In terms of yuan internationalization, 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 <F.N>,
speaking at the same conference, said his priority was domestic
capital market liberalization to reduce dependence on bank lending.
YUAN GLOBALISATION
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 centers 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 organization 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 Credit Suisse.
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 Kong.
[REUTERS MEDIA; By
Saikat Chatterjee and Pete Sweeney]
(Additional reporting by Lu Jianxin;
editing by Neil Fullick)
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