Shanghai Free-Trade Zone (FTZ): Foreign Banks Not Happy With Ambiguous Regulation

China had hoped Shanghai’s new free-trade zone (FTZ) would someday make the city an international financial hub on par with Hong Kong. Well, regulation delay isn’t exactly the way to expedite the process.

Foreign banks that were lobbied by the Chinese government to open branches in the free-trade zone have been left with little to do by ambiguous guidance and regulations that have yet to come into force, the South China Morning Post reports.

Last week, Singapore’s DBS Bank and Hong Kong’s Bank of East Asia, became the first and only two foreign banks that were officially approved to open for business at their new branches in the Shanghai free-trade zone. More approvals were expected to be offered quickly to other foreign banks, said government sources, according to the report.

For FTZ, which was launched in late September, “the only change so far appears to be that companies allowed to invest in it will not have to go through an approval process,” McKinsey Asia chairman Gordon Orr said in the part of his research report published earlier this month titled "The Shanghai Free Trade Zone will be fairly quiet."

The FTZ's “negative list” of restricted and prohibited projects, however, matches the categories in the government’s fifth Catalog of Industries for Guiding Foreign Investment, the report noted.

While there’s a chance that Shanghai will ease the limitations, the ambiguous situation provides authorities with “full freedom to maintain the status quo or to pursue bolder liberalization in the FTZ in 2014 if they see a need for a stimulus of some kind,” Orr said.

“On balance, I’d say this is relatively unlikely to happen,” he added.

In early December, the People’s Bank of China announced a “reform guidance” to support the Shanghai FTZ.

The document said upcoming policy initiatives will include regulations allowing foreign companies with subsidiaries in the zone to issue yuan-denominated bonds; to allow foreigners to buy and sell Chinese equities and bonds directly without going through current pilot programs and to similarly enable Chinese individuals in the zone to buy overseas financial products without going through the current Qualified Domestic Institutional Investor (QDII) program.

But the blueprint was too general for the Shanghai government to quickly implement in real-life cases and it didn't specify any deadline for implementation.

Tu Guangshao, deputy mayor of Shanghai, said on Monday at the Asian Financial Forum in Hong Kong, that details of a pilot scheme for yuan capital account convertibility in the Shanghai FTZ will be announced this quarter.

"It is a major year for the FTZ where more progress, especially on the opening of capital account, can be seen. Relevant legislation, negative list and outbound investment will be made," he said.

He also believes the yuan will become a freely convertible currency in 5 to 10 years.