New Financial Pilot Scheme Proposed for Shanghai FTZ

On October 29, the People’s Bank of China, jointly with the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission, the Ministry of Commerce, the State Administration of Foreign Exchange and the Shanghai Municipal Government, released the Scheme for Facilitating the Financial Opening and Innovation Pilots in China (Shanghai) Pilot Free Trade Zone, and Speeding up the Construction of Shanghai International Financial Center (“Forty Articles”). This is the first time that all of the financial regulators, the Shanghai Government and the relevant authorities have jointly released a pilot scheme for the China (Shanghai) Pilot Free Trade Zone (“FTZ”) since its establishment in September 2013. Compared with the Opinions on the Financial Support of the Development of the China (Shanghai) Pilot Free Trade Zone (“Thirty Articles”) issued by the People’s Bank of China on December 2, 2013, the Forty Articles, pursuant to the overall FTZ scheme enacted by the State Council and in light of the government’s long-term strategic missions, emphasize enhancing the interaction between the FTZ and the construction of a Shanghai international financial center.
We provide the following highlights of the Forty Articles and our preliminary interpretations.
General Principles
Both the Forty Articles and the Thirty Articles re-state the standing points of serving the real economy and facilitating trade and investment. We understand that any interpretation of the Forty Articles must reflect the recent China stock market crisis and the fluctuations of the RMB currency market. While the overall strategy of financial reform and opening up remains unchanged, China has shown a very cautious attitude towards the pace and details of opening up. We tend to believe that, based on the principles of “macro caution, controllable risk”, the financial regulators will not likely announce a definite timetable for the liberalization of capital accounts and will rather respond in a flexible manner to domestic and foreign market changes.
Capital Account Convertibility and RMB Cross-Border Usage
In terms of the utilization of free trade accounts, the Forty Articles put forward (i) speeding up the initiation of various bank account businesses, including the RMB and currencies businesses, by utilizing the free trade accounts, (ii) expanding the utilization of various functions of free trade accounts, and (iii) encouraging financial institutions as well as exchanges and clearing houses to utilize free trade accounts to develop financial innovations.
However, as to the widely watched individuals’ outbound investment (i.e., the so-called QDII2) and two-way access to securities and futures markets by qualified FTZ entities and individuals, “doing research on initiating certain pilots” and “speeding up promulgating certain measures” seem to be only echoing existing goals, without putting forward any specific measures. This indicates that, in the near future, it is unlikely to see the release of specific measures for QDII2 or two-way access to secondary markets by FTZ entities and individuals. And, even if such measures are released, they may only relax existing regulations, continuing the trend of high regulation and great caution.
With regard to the cross-border usage of RMB, the Forty Articles mainly put forward two aspects, namely (i) issuing RMB bonds in China by overseas entities and (ii) investing in financial products in China using overseas RMB. These two reform measures are related to the overall goal of enhancing the cross-border usage and flow of RMB, and are unlikely to be limited to the FTZ.
Opening up of Financial Services Industry
Contents regarding the opening up of the financial services industry are set forth in a total of 18 articles, accounting for the largest portion of the Forty Articles, and involve the banking industry, securities industry, insurance industry, outbound equity investment, internet finance and mixed operation of financial industries. The Forty Articles specify that the opening up of financial service industries include both opening to private capital and to foreign capital.
In terms of the banking industry, the Forty Articles encourage the use of private capital to establish banking financial institutions, including commercial banks, finance leasing companies, finance companies, auto finance companies and consumer finance companies, and also encourage qualified and eligible banking institutions to set up various affiliates in the FTZ, and commercial banks to expand their offshore businesses.
In terms of the securities industry, it is noteworthy that the Forty Articles support the cross-border securities and futures businesses. For example, securities and futures institutions may conduct cross-border brokerage and cross-border asset management businesses in the FTZ, and engage in overseas securities, futures and derivative trading after obtaining pilot approval. The Forty Articles also permit fund companies’ subsidiaries to conduct cross-border asset management and overseas investment advisory businesses. It is worth questioning whether “cross-border asset management business” herein means to create an additional channel for the overseas asset management business, besides the current QDII channel. In addition, the Forty Articles permit the establishment of joint venture securities companies where foreign shareholding does not exceed 49% and domestic shareholders are not required to be securities companies. The Forty Articles also allow the establishment of joint venture securities investment consulting companies, as well as the establishment of subsidiaries specializing in index fund management.
This section also involves many directive opinions, such as supporting the innovation of internet finance in the FTZ, subject to the principle of controllable risk, and exploring the mixed operation of financial industries. It is interesting to observe that the Forty Articles expressly encourage financial institutions from countries or regions that have entered into free trade treaties with China to take the lead in establishing joint venture financial institutions in the FTZ. This means that there may be an increased chance for financial institutions headquartered in countries or regions that have entered into free trade treaties with China to obtain approval to establish joint ventures.
Internationally Oriented Financial Markets
The core of this section concerns the construction of financial market platforms that are oriented towards international investors and to utilize these market platforms to expand channels for overseas investors to participate in domestic financial markets. Three platforms are to be constructed under the supervision of the People’s Bank of China — the international financial asset trading platform of the China Foreign Exchange Trading System, the international board of the Shanghai Gold Exchange, and the shipping financing and bulk commodity OTC derivatives clearing platforms of the Shanghai Clearing House. Two platforms are to be constructed under the supervision of the China Securities Regulatory Commission — the international financial assets trading platform of the Shanghai Stock Exchange and the Shanghai International Energy Trading Center. The platform to be constructed under the supervision of the China Insurance Regulatory Commission is the Shanghai Insurance Exchange.
Financial Regulation and Risk Prevention
The Forty Articles stress the coordination of regulators and risk prevention. In addition to enhancing coordination among financial regulators, the Forty Articles encourage central financial regulators to research delegating certain supervisory functions (the exercise of which is meaningful to the market or convenient to product innovation) to the financial supervisory authorities or the organizations and institutions of financial markets located in Shanghai.
Our Observations
Recent changes in domestic markets and the regulatory environment unavoidably cause market participants to be concerned about the impact of same on the process of financial reform and market opening. In such situation, we believe that the Forty Articles sends especially positive signals. Although its basic tone adheres to the principles of macro caution and controllable risk, the overall direction of financial reform and the pilot, as well as the aim of “initiating and trying-out in the FTZ” remain unchanged. We hope that various financial regulators formulate detailed measures and steadily push forward the pilot programs in the near future, and also that the construction of various financial markets and platforms in the FTZ will be smoothly carried forward.