Sep 06, 2013

    Free yuan exchange in Shanghai FTZ

    CHINA will allow unfettered exchange of its yuan currency in its first free-trade zone (FTZ), a draft plan showed, in a bold push to reform the world's second-largest economy.

    The FTZ in Shanghai is intended to make the city 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 - as one of the crowning achievements of his administration, they said.

    The plan showed that the FTZ goes beyond greater liberalisation of trade, to include investment and financial services such as free convertibility of the currency.

    "Under the pre-condition that risk can be controlled...convertibility of the renminbi on the capital account will be conducted (in the zone), the first to carry out and test (it)," the plan said.

    It does not explicitly state that the exchange rate will be purely market set.

    The yuan - also known as the renminbi - is convertible for trade, but the government keeps a tight grip on the capital account on worries that unpredictable inflows or outflows could harm the economy and reduce the government's control over it.

    A government official familiar with the plan 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 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 sq km FTZ groups four existing areas in Shanghai: the international airport, deep-water port, a bonded zone and a logistics area.

    "They want an offshore harbour, basically like Hong Kong," said a financial-industry executive briefed on the plan.

    The State Council, China's Cabinet, gave the FTZ its go-ahead last month and details will be announced after the "overall plan" is approved on Sept 27, officials said.