PBOC aims to promote market liberalization

The People's Bank of China said on Monday it will permit businesses and individuals to open offshore accounts in the China (Shanghai) Pilot Free Trade Zone, a decision intended to promote cross-border investment in the pilot area.

The central bank said the move will hasten progress toward market-determined interest and exchange rates and promote full convertibility of the yuan.

Access to offshore accounts will allow more companies and people to take part in "growing foreign-related economic activities in the FTZ", according to a statement on the central bank's website

Foreign nationals will be eligible to open an offshore account in the FTZ. They will be treated as local residents for this purpose.

All financial institutions in Shanghai will be able to offer this service via a separate accounting unit for FTZ transactions.

There will be no barriers to money transfers between the offshore accounts in the FTZ and overseas accounts. However, transactions with domestic bank accounts will be classified as cross-border transactions and therefore regulated.

The accounts can be used for cross-border financing and assurance, as well as individual investment by Chinese nationals in overseas securities and by foreigners in the domestic capital market, according to the central bank.

Investors will also be able to conduct foreign-currency transactions involving the yuan within their accounts, without a daily limit "when conditions mature", according to the bank.

The PBOC will also remove the interest rate ceiling on foreign-currency deposits "at an appropriate time".

Lu Zhengwei, chief economist at Industrial Bank Co, said the biggest step taken so far by the PBOC to support the new zone was to allow individuals to invest in overseas markets. Those investments will no longer be restricted by quotas under the qualified domestic institutional investor program.

Foreign companies will also benefit because they'll be exempt from quotas under the qualified foreign institutional investor system, Lu said.

"But implementation of these guidelines still depends on detailed operating rules, because there are many restrictive conditions in the description."

Li Jianjun, an analyst in international finance at Bank of China Ltd, said: "Reform in foreign exchange management, compared with other reform measures such as interest rate liberalization and yuan internationalization, is likely to be implemented faster."

A research note by Shenyin & Wanguo Securities Co Ltd said offshore finance will be a key area in the development of the FTZ in 2014.

Multinational companies will carry out more capital settlements in the FTZ. Financial institutions will launch more innovative offshore products in the area, the securities firm said.

So far, 47 financial institutions, including 12 foreign banks, have received approval to set up a branch in the FTZ, two months after the zone was officially launched.

As for the possible risks associated with speculative capital, the PBOC said it will pay close attention to irregular cross-border capital movements.

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