China opens new trade zone in Shanghai, reform plans unveiled

Reuters

* Restrictions lifted on individual cross-border investment

* Loan-to-deposit ratios, other regs on banks to be eased

* Intl oil futures trading platform planned

* Deeper reforms subject to risk control implementation -c.banker

By Gabriel Wildau and Pete Sweeney

SHANGHAI, Sept 29 (Reuters) - China opened a new free tradezone in Shanghai on Sunday in what has been hailed aspotentially the boldest reform in decades, and gave freshdetails on plans to liberalise regulations governing finance,investment and trade in the area.

Officials gave no details on when specific initiatives willbe implemented but the government has said most will beintroduced in the next three years.

The Shanghai FTZ, which covers an area of nearly 29 sq km onthe eastern outskirts of the commercial hub, was approved byChina's State Council, or cabinet, in July.

State-run Xinhua news agency quoted Commerce Minister GaoHucheng as saying that the creation of the FTZ was a crucialdecision for China's next wave of reform and opening-up.

"It follows the trend of global economic developments andreflects a more active strategy of opening-up," Gao said at thelaunch ceremony.

The State Council said on Friday it would open up itslargely sheltered services sector to foreign competition in thezone and use it as a test bed for bold financial reforms,including a convertible yuan and liberalised interest rates.

Economists consider both areas key levers for restructuringthe world's second-largest economy and putting it on a moresustainable growth path.

Some Chinese and foreign firms are already setting upsubsidiaries in the zone.

A total of 25 companies so far have been approved to startoperations in a variety of sectors, alongside 11 financialinstitutions, most of which are domestic banks but including themainland subsidiaries of Citibank and DBS.

Ralph Haupter, corporate vice president of Microsoft Corp, speaking on the sidelines of the opening ceremony,said Microsoft was excited about the zone's potential.

"Details and sizes of business are hard to predict at thisstage. But business is continuously growing and theentertainment business is very important for us at Microsoft."

A Xinhua report quoted a document from China's Ministry ofCulture saying the ministry would remove a 13-year old ban onvideo game console manufacture and sale for companies registeredin the zone, provided the products were approved.

"Foreign game machine manufacturers will be eligible to selltheir products in China, merely via their entities registered inthe zone," the report said.

HIGH HOPES, OR NOT?

Some have compared the FTZ, which integrates three existingzones, to Deng Xiaoping's creation of a similar zone in Shenzhenin 1978 which was crucial to China's economy opening up toforeign trade and investment.

Optimism among mainland investors that the zone will triggerfresh investment and infrastructure spending has sent propertyprices and FTZ-related stocks soaring in recent weeks.

Sceptics point to a similar scheme launched last year nearShenzhen, in Qianhai, that so far has failed to meetexpectations.

But analysts and economists say that the Shanghai plan ismore ambitious and specific, such as in regulations on howforeign and Chinese individuals can invest across borders.

Foreign and Chinese investors have only been allowed toinvest cross-border by buying into funds regulated througheither the Qualified Foreign Institutional Investor (QFII)programme or the Qualified Domestic Institutional Investor(QDII) programme, both of which are restricted by quotas.

But Dai Haibo, deputy director of the zone administrativecommittee, said on Sunday foreigners and Chinese in the zonewould be allowed to invest funds directly for the first time. Hedid not say whether they would also be subject to a quota.

He also said that foreign banks in the zone would be allowedto issue bonds in the domestic market.

Officials said China would develop an international oilfutures trading platform in the zone and encourage foreignparticipation, part of attempts to upgrade commodities marketsand hedge risk in the world's largest energy consumer.

The insurance regulator added on Sunday that it wouldsupport allowing foreign health insurance providers to operatein the zone and would also back the development ofyuan-denominated cross-border reinsurance, among other reforms.

REGULATORY REQUIREMENTS FOR FOREIGN BANKS

Regulations of Chinese and foreign banks will also be eased,said Liao Min, head of the Shanghai branch of the China BankingRegulatory Commission (CBRC), adding the CBRC will adjustloan-to-deposit ratios and other regulatory requirements relatedto cross-border financing for banks in the zone.

Cross-border financing could potentially drastically reducefunding costs for Chinese firms and expose domestic banks tomore foreign competition, but would also provide Chinese banksan outlet to find new clients overseas.

Liao said that the government would consider easingregulatory requirements for foreign banks when they apply toupgrade representative offices to full-fledged branches in thezone, and it would accelerate the application process forforeign banks applying for yuan settlement licences.

Both functions are key for foreign banks seeking to dobusiness in China, and the slow pace of approval has been asubject of frequent complaints from foreign bankers.

Given the mixed history of other capital account reformprojects and the current speculative environment, regulatorshave been signalling caution in recent weeks.

The project is widely considered to be a pet programme ofPremier Li Keqiang but he did not attend the opening ceremony.The heads of the central bank and the foreign exchange regulatorwere also absent.

The highest ranking official from the central government wasCommerce Minister Gao.

State media have run commentaries warning against undueproperty speculation, and have said that the most dramaticreforms were unlikely to be enacted this year.

"All reforms to interest rate and exchange rate systems willbe based on the premise of risk control," Zhang Xin, head of theShanghai branch of the People's Bank of China, told a pressconference on Sunday.

Experts also doubt Beijing will be able to implement majorchanges in the zone without them spilling over into the rest ofthe country. Numerous high profile academics and officials haveargued publicly against introducing them in this way.

There have also been reports of bureaucratic turf wars overwhich agency will drive financial reform.

Liao Qun, China chief economist at Citic BankInternational, said the tone of the master planningdocument remains cautious given the challenges.

"Liberalisation may not be realised all at once."

Foreign investors continue to await the publication of a"negative list" of banned investment targets and industries.

In the past foreign investors were put off by vagueexplanations of what industries could be invested in and whatremained off limits. The negative list concept would allow freeforeign investment in any industry not specifically on the list.

Shanghai government officials told Reuters the list would bepublished at some point on Sunday. Reuters was unable to findsuch a list on any major government website at time ofreporting.

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