The PBOC has released Opinions on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone (the Opinions) in order to implement the decisions of the 3rd Plenary Session of the 18th CPC Central Committee and the strategic arrangements of the State Council on establishing China (Shanghai) Pilot Free Trade Zone (the FTZ), to promote development of real economy in the FTZ, to step up financial support for cross-border investment and trade activities, and to deepen financial sector reform.
Based on the Framework Plan for the FTZ, the Opinions follow the general principle of providing service to the real economy and facilitating cross-border investment and trade, aim to support opening-up, innovation and experiment in the FTZ, and endeavor to explore ways to facilitate exchange for investment and financing, to promote the cross-border use of RMB, to steadily advance market-based interest rate reform, and to deepen foreign exchange administration reform. These measures of financial sector support are launched to expand the room for real economy development and increase the competitiveness of the FTZ so that the FTZ can participate in international competition and cooperation at a higher level.
Specifically, the financial sector support measures will be rolled out in four major areas to support real economy development and facilitate cross-border investment and trade. The first area is to explore how to facilitate exchange for investment and financing, advance the progress towards capital account convertibility, expand the opening-up of the FTZ, and support Chinese enterprises to go global. The second area is to promote the cross-border use of RMB, make it more flexible for companies and individuals to use local currency in their cross-border transactions, and reduce exchange costs and exchange rate risks. The third area is to advance market-based interest rate reform, speed up the progress, and support development of the real economy. The fourth area is to deepen foreign exchange administration reform, further streamline administrative approval, and gradually build a system of foreign exchange administration compatible with the institutional arrangements in the FTZ.
In terms of the pace of implementation and risk prevention, the Opinions follow the principle of keeping risks within a controllable range, advancing the implementation gradually but steadily, and organizing the pilot program at opportune moments in an orderly way. The detailed reform measures in the Opinions will be implemented on an incremental basis when conditions have matured to secure the orderly progress of the pilot program. Based on the principle of keeping risks within a controllable range and making steady progress, the PBOC will formulate implementation details for the reform measures and organize the actual implementation. Moreover, the Opinions provide a series of risk control measures from a macro-prudential perspective to ensure risk management in the entire process. Based on the separate account management, enterprises will be able to open free trade accounts and the financial institutions will establish a separate accounting system for their outlets in the FTZ to satisfy the demands of clients in the FTZ with a wider range of cross-border activities. The PBOC and Shanghai Municipal Government will strengthen monitoring and analysis, closely monitor the anomaly in cross-border capital flow, and regulate the institutions in the FTZ by dividing them into different categories. The PBOC may strengthen regulation over short-term speculative fund flow based on assessment of the situation.
The above measures will be implemented in order to help establish a model for business innovation and management in supporting development of the real economy and facilitating trade and investment in the FTZ which can be copied and introduced in other regions, support the FTZ to become an “experimental field” that will promote reform and openness of the economy, lead the way in further reform, and provide services to the whole country.
Opinions of the PBOC on Financial Measures to Support the China (Shanghai) Pilot Free Trade Zone
The PBOC has released the following opinions in order to implement the important strategic decision of the CPC Central Committee and the State Council on establishing the China (Shanghai) Pilot Free Trade Zone, support the development of the FTZ and the real economy development in the FTZ, deepen financial sector reform, and promote opening-up.
I. General Principles
1. The principle of financial sector serving the real economy will be followed to further facilitate trade and investment, promote the opening of financial sector and facilitate the FTZ to compete internationally on a higher platform.
2. The principle of continuing reform and innovation, and leading the way in experiment will be followed to promote the cross-border use of RMB, the move towards capital account convertibility, market-based interest rate reform and foreign exchange administration reform.
3. The principle of keeping risks within controllable ranges and making steady progress will be followed to organize experiments in an orderly manner whenever the conditions for an experiment are mature.
II. Innovations in Account Management System that Facilitates Risk Management
4. Residents in the FTZ can open local and foreign currency free trade accounts (hereinafter referred to as a resident free trade account) to realize separate accounting for their transactions and to conduct innovative investment and financing activities specified in Part III of the Opinions; non-residents can open local and foreign currency free trade accounts with banks that operate in the FTZ (hereinafter referred to as a non-resident free trade account) and receive financial services based on the principle of pre-access national treatment.
5. Fund can be transferred freely between a resident free trade account on the one hand, and an overseas account, or a non-resident account opened in China but
outside of the FTZ, or a non-resident free trade account, or a free trade account of another resident on the other. Fund can be transferred between a resident free trade account and other bank settlement accounts held by the same non-financial company or agency for the purpose of current account transactions, loan repayment, investment in the real economy and other cross-border transactions that comply with relevant regulations. The fund transfer between a resident free trade account and a bank settlement account opened within China but outside the FTZ is to be regulated as cross-border business.
6. A resident free trade account and non-resident free trade account can be used for cross-border financing and guarantee transactions. When conditions are mature, the foreign currency and local currency fund can be converted freely within a free trade account. An RMB exchange and remittance monitoring mechanism will be established covering the resident free trade accounts and non-resident free trade accounts in the FTZ.
7. Financial institutions in Shanghai can establish a separate accounting system for the FTZ in accordance with the PBOC regulations, open free trade accounts for eligible clients in the FTZ, and provide financial services.
III. Explorations to Facilitate Exchange and Remittance for Investment and Financing
8. Measures will be taken to facilitate cross-border direct investment by enterprises.
In the FTZ, cross-border direct investment can be conducted and delinked from the upfront verification as required by the regulations of the Shanghai municipal government, i.e., the cross-border payment, receipt, and exchange involved in the investment can be directly processed by banks.
9. Measures will be taken to facilitate cross-border investment by individuals.
Eligible individuals who are employed in the FTZ can make various kinds of overseas investment including securities investment. The income that an individual has legally obtained within the FTZ can be used for payment to overseas recipients after tax payment obligations are honored. The businesses established by self-employed individuals in the FTZ can provide cross-border
loans to its overseas operations based on the need of the business operations. Overseas individuals who are employed in the FTZ can open non-resident specialized account for personal investment within China and make various kinds of investments in China including securities investment.
10. Measures will be taken to steadily open up the capital market. Financial institutions and enterprises in the FTZ can make investment and trading on the securities and futures markets in Shanghai in accordance with relevant regulations. The overseas parent company of an enterprise located in the FTZ can issue RMB-denominated bonds in China’s domestic bond market in accordance with relevant regulations. Based on market demand, explorations will be made to conduct international financial asset trading in the FTZ.
11. Measures will be taken to facilitate overseas financing. According to operational needs, Chinese- and foreign-funded enterprises, non-bank financial institutions and other economic units registered in the FTZ (hereinafter referred to as units in the FTZ) can borrow domestic and foreign currency-denominated funds from overseas markets according to relevant regulations. Efforts will be made to improve macro-prudential regulation over all kinds of foreign debts, and effective measures will be taken to prevent foreign debt risks.
12. A variety of risk hedging instruments will be provided. Based on authentic demand for managing currency and maturity mismatch, units in the FTZ can hedge risk in the FTZ or overseas markets in accordance with relevant regulations. Eligible enterprises in the FTZ are allowed to conduct overseas securities investment and derivative investment. Financial institutions shall square or hedge the open positions in the FTZ separate accounting system that arise from providing domestic and foreign currency exchange and remittance service to other institutions in the FTZ or overseas institutions in the FTZ or overseas markets. Based on the demand for risk management, separate accounting units in the FTZ can conduct derivative transactions in overseas markets in accordance with relevant regulations. Upon approval, a separate accounting unit can borrow, lend or conduct repo transactions in the domestic interbank market within a prescribed quota.
IV. Measures to Promote Cross-border Use of RMB
13. Based on the three principles of “know your customer”, “know your business” and “due diligence”, banking institutions located in Shanghai can directly process cross-border RMB settlement for current account transactions and direct investment after the units in the FTZ (with the exception of the enterprises who are on the list of focused supervision of RMB settlement of export trade in goods) and individuals in the FTZ submit receipt and payment orders.
14. Financial institutions located in Shanghai can work together with payment institutions that hold payment business license and that include Internet payment in the range of business to provide RMB settlement service for cross-border e-commerce (trade in goods and services) in accordance with the regulatory policy applicable to payment institutions.
15. Financial institutions and non-financial companies located in the FTZ can borrow RMB fund from overseas but the borrowed money must not be used for investment in securities or derivatives, nor for entrusted lending.
16. Enterprises located in the FTZ can conduct two-way RMB fund pooling business within their enterprise group based on the need of business operation to provide centralized receipt and payment service for current account transactions of their affiliated enterprises located in China and overseas.
V. Measures to Steadily Promote Market-based Interest Rate Reform
17. Establishment of a market-based interest rate system in the FTZ will be promoted based on the availability of basic conditions.
18. The market-based interest rate pricing monitor mechanism will be improved covering the RMB and foreign currency fund in resident FTA and non-resident FTA accounts.
19. Eligible financial institutions in the FTZ will be included in the list of institutions that will lead the way in issuing inter-bank CDs so that the FTZ will be the test ground for inter-bank CD issuing.
20. When the conditions are available, the foreign currency interest-rate ceiling applicable to the small-value fund in the general accounts in the FTZ will be lifted.
VI. Measures to Deepen Foreign Exchange Administration Reform
21. The FTZ’s efforts to develop a CBD and promote new trade will be supported.
More enterprises will be included in the pilot program of foreign currency fund centralized management by multinational company headquarters, the regulation of foreign currency fund pooling will be further simplified, and the foreign exchange administration pilot program covering international trade settlement center will be deepened to facilitate trade and investment.
22. Foreign exchange registration procedure for direct investment will be simplified.
The foreign exchange registration and alteration registration for direct investment will be delegated to the banks and ex-post surveillance will be strengthened. Under the precondition of ensuring authentic transactions and integrity of collected data, the foreign exchange fund involved in an FDI project in the FTZ may be sold to the banks on a voluntary basis.
23. Overseas and domestic leasing services will be supported in the FTZ. The case-by-case approval applicable to overseas leasing and other overseas claim businesses of financial leasing companies will be replaced by registration-based management. After being approved, financial leasing companies and Chinese-funded leasing companies are allowed to receive rents in a foreign currency for their domestic leasing business. The procedure of prepayment for goods purchase will be simplified for large-scale leasing projects involving aircrafts and ships.
24. The verification and approval procedure will be removed for payment of guarantee fees by units in the FTZ to overseas recipients so that these units may go directly to bank counters to purchase foreign exchange and pay guarantee fees.
25. Foreign exchange surrender management will be improved to support commercial banks to conduct OTC trading of commodity derivatives with their clients.
VII. Monitoring and Regulation
26. Financial institutions and designated non-financial institutions located in the FTZ shall earnestly honor anti-money laundering, counter-terrorism financing and tax evasion prevention obligations in compliance with relevant laws and regulations, report to the PBOC and other financial regulatory agencies their balance sheet and other business operation information in a timely and accurate manner, ensure the integrity of data, go through BOP statistics declaration procedures in accordance with relevant regulations, and cooperate with financial regulatory agencies to closely watch the anomalies in cross-border fund flow.
27. The Shanghai Municipal Government can establish an FTZ comprehensive information oversight platform to regulate non-financial institutions, evaluate the non-financial institutions on an annual basis, and divide them into different groups based on the evaluation outcome to exercise oversight.
28. The business recorded in the FTZ separate accounting system shall be included by a legal person bank in the calculation of capital adequacy ratio. The liquidity management of the FTZ outlets should follow the principle of seeking a balance on their own while liquidity can be provided by the outlet at the next higher level when necessary.
29. Macro-prudential regulation will be applied to the FTZ. The PBOC may strengthen regulation over short-term speculative capital flow in the FTZ based on its assessment of the situation, and may even take temporary control measures. The communication and coordination with other financial regulatory agencies will be strengthened to ensure the prompt and adequate sharing of information.
30. The PBOC will formulate detailed implementation rules, organize the implementation based on the principle of keeping risks within a controllable range and making steady progress, and set up good arrangements to coordinate with the macro-prudential requirements of other financial regulatory agencies.