China’s central bank signalled fresh support for financial experimentation yesterday as Beijing moves to reinvigorate reform in the Shanghai Pilot Free Trade Zone, which has been widely criticised for failing to live up to high expectations.
China’s central bank signalled fresh support for financial experimentation yesterday as Beijing moves to reinvigorate reform in the Shanghai Pilot Free Trade Zone (FTZ), which has been widely criticised for failing to live up to high expectations.
Planned reforms include allowing some firms to trade derivatives and futures in the zone, as well as allowing more foreign and private investment in financial services, according to a statement by the People’s Bank of China (PBoC).
Other moves would make it easier for citizens in the zone to make outbound investments and allow foreign issuance of onshore yuan-denominated bonds by companies in the FTZ, among other initiatives.
The commitments are largely repetitions of previous plans for the zone, which was originally trumpeted as a new hotbed of reform but has subsequently been widely regarded as a disappointment in terms of financial reform and market opening.
But if implemented, they would indeed mark significant steps towards testing and implementing policies that could ultimately be implemented nationwide.
Some investment firms have taken advantage of easier mechanisms for moving money in and out of the country in the FTZ.
Hedge funds in particular have used the zone’s easier registration environment to create companies that can raise funds in China and then trade on Chinese exchanges in cooperation with domestic partners.
However, promises to deliver more substantial reforms have yet to be realised, diminishing the FTZ’s appeal, and even state-owned domestic media have criticised FTZ officials for foot-dragging.
“Indeed, people have been quite disappointed with the developments in Shanghai FTZ so far as the financial experiments in FTZ are struggling due to regulatory environment,” wrote Zhou Hao, economist at Commerzbank in Singapore in a research note reacting to the news.
“In our view, this is a brave move as the market volatilities are picking up amid the economic slowdown, and this is also a brave response to market speculation that China will slow down capital account openness after the stock and FX market rout.”
Recent crackdowns on derivatives traders during the stock market crash in China over the summer have cooled enthusiasm among the investment community for doing business in China generally, and the heavy-handed way the rescue attempt was conducted caused some to question whether the Chinese government was really willing to let market forces determine pricing.
The Chinese Communist Party said on Thursday at the conclusion of its annual plenum that it would increase support for free trade zones being implemented around the country as catalysts for liberalisation.
It is also trying to position the yuan for inclusion in the International Monetary Fund’s basket of reserve currencies – which would give a significant if symbolic boost to the yuan’s global status.
Financial regulators have thus begun moving more quickly to resume liberalisations to the foreign exchange market and capital account.
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