Shanghai Free Trade Zone Update

Published on 2014-03-04

We remain optimistic that the FTZ is still progressing in the right direction, and that perhaps expectations surrounding the speed of reforms were overly optimistic to begin with.

The initial launch of the Shanghai Free Trade Zone (FTZ) was met with much fanfare as a bold step forward in pushing China towards market-oriented reforms for its financial and service sectors. At first glance, the progress thus far has been gradual and excitement about the FTZ seems to have diminished in the past few months. We remain optimistic that the zone is still progressing in the right direction, and that perhaps expectations surrounding the speed of reforms were overly optimistic to begin with. Two recent updates highlight the progress being made in the zone and the potential for larger reforms to expand to the rest of China in the months and years to come.

The first new reform, implemented last month, was the liberalisation of foreign currency deposit rates within the FTZ. China’s banks are already allowed to set their own lending rates, following a reform implemented last year, but this is the first instance where deposit rates will become fully adjustable. While the move does not apply to the vastly-larger pool of RMB-denominated deposits, it still represents the first step towards allowing banks to set their own deposit rates, and eventually moving towards free-floating interest rates across the banking sector.

The second new reform to emerge within the FTZ in the past few months was the approval of cross-border RMB loans within the zone. It was reported that the Singapore branch of ICBC lent RMB 100 million to a subsidiary of Shanghai Baosteel and RMB 70million to Sinopharm Group. In addition, the Bank of Communications Financial Leasing (BCFL) obtained a RMB 700 million loan from Bank of Communications Singapore through the BCFL branch in the FTZ. The move to open up cross-border RMB lending is expected to accelerate the internationalization of the Chinese currency and improve Shanghai’s position as a financial center. It will also help mainland businesses to access lower interest rates. Currently lending rates on the mainland are above six percent, while offshore yuan borrowers can pay less than four percent.

Both of these reforms undoubtedly fall short of the expectations of some market watchers. However, market regulators in China continue to believe that such significant and overarching reforms need to be tested on a small scale before being rolled-out across the whole country. The FTZ will continue to be this testing ground, and barring unforeseen shocks the reforms will eventually be expanded to a larger scope to provide the long awaited boost to growth that many anticipate.

Learn more about the Chamber's FTZ Focus Group>>