SHANGHAI (AFP) – China will allow unfettered exchange of its yuan currency in its first free trade zone, a draft plan seen by AFP Thursday showed, in a bold push to reform the world’s second largest economy.
The free trade zone (FTZ) in Shanghai is intended to make the city into a true international trade and financial centre and challenge the free economy of Hong Kong, a special administrative region of China, analysts and government officials said.
Premier Li Keqiang, who took office in March, is backing the zone — which his cabinet approved last month — to be one of the crowning achievements of his administration, they said.
The draft plan seen by AFP showed the FTZ goes beyond greater liberalization of trade to take in investment and financial services, including free convertibility of currency.
Convertibility of the yuan — allowing the currency to be freely bought and sold, and with it the movement of funds into and out of China — is the main obstacle preventing Shanghai from competing with global financial centers such as Hong Kong, New York or London.
The government keeps a tight grip on the capital account — investment and financial transactions, rather than those related to trade — on worries that unpredictable inflows or outflows could harm the economy and reduce its control over it.
But companies in the zone will have the freedom to trade the yuan, also known as the renminbi, according to the plan.
“Under the pre-condition that risk can be controlled, in the zone convertibility of the renminbi on the capital account will be conducted, the first to carry out and test (it),” it said.
China’s yuan currency has so far only been convertible for trade — to buy imported goods or turn revenue from exports back into local funds.
A government official familiar with the plans said companies registered in the FTZ could open special accounts to freely exchange yuan, but with only a few exceptions they would be required to close their onshore Chinese accounts.
Under the draft plan, the FTZ would let interest rates be set by the market.
China currently fixes deposit rates by administrative order, but the central bank began allowing banks to decide their own lending rates in July.
According to the Ministry of Commerce, the 29-square-kilometre FTZ groups four existing areas in Shanghai: the international airport, deepwater port, a bonded zone and a logistics area.
The draft plan said the FTZ would “support” establishment of foreign and joint venture banks and welcome privately-funded financial institutions.
At present, China’s banking sector is overwhelmingly dominated by state-run entities.
“They want an offshore harbour, basically like Hong Kong,” said a financial industry executive briefed on the plans.
Analysts said Hong Kong still has advantages over Shanghai, such as the rule of law and existing financial infrastructure, but it will need to do more to remain competitive.
Copyright 2013 The National Memo