• Professional News
  • 20 August 2013

Beijing eases entry for foreign banks to Shanghai free-trade zone

Premier Li Keqiang has approved a milestone plan to allow foreign banks to directly set up wholly owned subsidiaries in Shanghai's new free-trade zone. The aim is to accelerate the opening of the financial services sector to global players.

Following Premier Li Keqiang’s approval of the milestone plan, foreign banks will be permitted to set up directly in the free-trade zone in Shanghai’s Pudong New Area. They will also be allowed to establish joint-venture banks with mainland partners, either state-backed or from the private sector. Overseas partners will be allowed to own the majority stake.

The approval will significantly ease the entry for foreign banks cutting otherwise lengthy approval processes.

Until now, the procedure for foreign banks has been to first set up a representative office to be used for communication and consulting purposes. After two years, an application requesting an upgrade of the office to a full-scale bank branch may be sent to the China Banking Regulatory Commission, provided the office has not breached any financial rules. If a foreign bank wants to set up more branches, particularly to expand into new cities or establish a wholly owned unit, it must submit to a long approval process involving the banking regulator and relevant government bodies, such as the tax department.

The move potentially cuts years off the time foreign banks must otherwise spend following a step-by-step regulatory roadmap before opening branches or subsidiaries on the mainland and is seen as a sign of renewed effort to kick-start financial reform.

A testing ground for reforms to free up cross-border flows
The new government is keen to accelerate financial industry reforms. Allowing foreign banks to skip the previously required long approval process to directly set up business units in the free-trade zone shows the determination to bring in more vigour to the Chinese domestic market.

The Chinese government also encourages domestic private firms and foreign enterprises to set up financial services companies, such as accounting and rating agencies, in the zone, widely expected to be a testing ground for major policy reforms to free up cross-border commodity and capital flows.

Foreign banks including HSBC and Citigroup have already set up branches and wholly owned units on the mainland, but the short cut to set up units in the free-trade zone in Shanghai is expected to attract more international banks keen to secure a foothold in the world's second-largest economy.

Encouraging offshore use of CNY
The new rules and changes are part of Beijing's bid to create the mainland's first free-trade zone in Shanghai, the latest policy initiative to promote the city's ambitions as a global business hub and international financial centre.

In allowing foreign banks to provide clearing services for financial transactions, this would also help further develop the international use of the yuan (CNY). It could be a major advantage for Shanghai, especially as there is still some insecurity in Beijing about Hong Kong being the major offshore yuan centre.

Beijing has been actively encouraging offshore use of the yuan in a bid to break the dominance of the US dollar as the de facto currency of global trade given that China is now nominally the world's biggest exporter.

Getting more businesses to use the yuan for trade settlement increases China's influence in the global economy despite the strict controls on the country's capital account that prevent the yuan from being freely convertible.

On July 3, the State Council issued a statement after a meeting chaired by Premier Li Keqiang that the free-trade zone in Shanghai would be a snapshot of an "upgraded Chinese economy".

More details about the plan for the trade zone will be released officially in the coming days; we will follow up and keep the status updated.

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