The People’s Bank of China (PBOC) issued an opinion in early December that will enable Chinese individuals and corporate entities in the Shanghai free trade zone (FTZ) to more freely trade and invest cross-border, a move aimed at accelerating China’s economic development and the globalization of the renminbi.
“That’s good for multinational companies because they’ll have more ways to work with Chinese suppliers and customers, and attract Chinese investors,” said Julian Zhou, a senior legal consultant on the China Practice Group at law firm Pillsbury Winthrop Shaw Pittman.
The PBOC opinion also contains within it procedures to set up a new foreign currency free trade bank account that can be opened by FTZ residents, including individuals and organizations, as well as non-FTZ residents at banks or their branches within the special zone. The accounts will enable various types of financing activities and allow for the free transfer of funds with any offshore or domestic bank accounts of non-PRC persons or entities.
Specifically, the accounts will allow resident holders to bypass the existing time-consuming approval requirements when converting RMB into foreign currencies for purposes of outbound payment or receiving foreign currency from a trade. “This undoubtedly will speed up cross-border transactions and also make the process more predictable,” said Pillsbury in a note to clients.
Mr. Zhou cautioned that even though the PBOC’s opinion establishes guidelines, banks must still develop internal rules itemizing the documents required to open an account and other procedures. He said the State Administration of Foreign Exchange (SAFE), a branch of the PBOC that oversees China’s foreign exchange controls, will likely work closely with China’s four big state-owned banks, including the Bank of China and ICBC, to develop the rules.
Mr. Zhou added that those banks are rumored to have already begun working on their internal procedures in conjunction with SAFE. “It will probably be at least two months before we see concrete and detailed rule coming out of the banks and SAFE,” Mr. Zhou said.
Before those rules become effective, however, approvals from other Chinese government agencies will be necessary. Mr. Zhou noted that PBOC only the controls foreign exchange, and for offshore transactions approval from at least two other agencies would likely be required. Given the importance placed on the Shanghai FTZ by the PRC, Mr. Zhou said, it’s likely the other governmental agencies will “either back up the PBOC’s opinion or come up with their own rules to give more preferential treatment to companies set up in the FTZ.”
Mr. Zhou said that the PRC appears to be mimicking the Hong Kong system . The latter, he said, is geared today toward multinationals looking to do business across Asia, whereas the Shanghai FTZ is aimed more toward multinationals who want to do business inside China. “By copying portions of the Hong Kong system, we hope businesses who want to be close to the Chinese markets can enjoy the same freedoms by setting up in Shanghai,” Mr. Zhou said.
Among the several transactions permitted by the accounts will be outbound investments without approval from SAFE and converting renminbi directly into foreign currencies for remittance out of China for investment purposes; investing offshore, including in foreign securities; and company loans to offshore operating subsidiaries without SAFE approval.