China's new free trade zones to hasten capital account opening

China formally announced details of three more free trade zones (FTZ) this week, a move that suggests the originally Shanghai-driven initiative has now escalated to the national level, analysts say.

The new FTZs in Guangdong, Fujian and Tianjin will be modelled after the Shanghai FTZ established in 2013 as a testing ground for looser rules governing currency conversions and foreign direct investment.

These FTZs have their unique advantages and functions. For Guangdong, it is cooperation with Hong Kong and Macau; Fujian will promote the relationship with Taiwan; and Tianjin, support development of the Beijing-Tianjin-Hebei economic zone.

Chinese Premier Li Keqiang visited the FTZ in Fujian, across the straits from Taiwan, the day after it opened on Tuesday, the official Xinhua News Agency said on Wednesday.

"Shanghai's FTZ will continue to lead the financial liberalisation and define the maximum level of capital account openness. However, the new FTZs will help expand the scale of RMB internationalisation and cross-border transactions," said ANZ analysts in a report.

Beijing also released the latest "negative list" where foreign investment is banned or restricted. The list was shortened to 122 items from the original 190 items and is applicable to all the four FTZs.

The "negative list" approach was touted as a major reform in itself, as previous lists had been full of gray areas that gave the government wide latitude to encourage or block investments on a case-by-case basis.

Banks in Hong Kong are already embracing the new FTZs. Standard Chartered said it had a first cross-border yuan payment for a Taiwanese enterprise in Fujian FTZ.

Bank of China (Hong Kong) also announced it had taken the lead in signing cooperation agreements or loan contracts with nine enterprises in the FTZs, with the total amount reaching 1.8 billion yuan ($290.45 million).

"The additional FTZs will significantly allow more enterprises to tap the offshore market. The relatively low foreign currencies funding costs offshore provide entities with more options for their cost-saving strategy," said Nathan Chow, an analyst at DBS in Hong Kong.

The Shanghai FTZ was launched in 2013 and carried out a slew of pilot programmes to liberalise China's capital account, including the popular cross-border pooling and sweeping scheme that helps multinational companies to manage their liquidity.

The scheme was such a success that about 36 percent of respondents surveyed by law firm Allen & Overy said they had relocated their regional treasury centers to China mainly due to the resolution of the "trapped cash" issue, when companies cannot move their funds out of China freely.

The new rules that allow nationwide pooling and the appearance of more FTZs will prompt more companies to consider at least some aspects of regional treasury elsewhere in China, Allen & Overy said.

The survey interviewed 150 senior executives from the United States, Europe and the Asia-Pacific region in January and February. The headquarters of these companies are all outside of the Greater China region.

China's yuan currency now ranks as the seventh most-used world payment currency with a market share of 1.81 percent, according to global transaction services organisation SWIFT.


WEEK IN REVIEW:

* Industrial and Commercial Bank of China , the world's biggest lender by assets, on Wednesday launched a yuan clearing bank in Thailand, aimed at easing trade and investment with Thailand and Southeast Asia.

* China and Malaysia have renewed their currency swap arrangement for a further three years, according to a report by China's official Xinhua news service, quoting a statement by the Malaysian central bank.

* China's capital outflows quickened to their highest level in two years, official data suggested, amid jitters about a protracted slowdown in the country and ahead of an expected rise in U.S. interest rates later this year.

* Britain favours the eventual inclusion of the Chinese yuan in the International Monetary Fund's SDR basket of currencies, finance minister George Osborne said on Friday, saying it was important to include emerging powers in the world system.