Shanghai Free Trade Zone's Policy Innovations; Impact on Metals Industry

SHANGHAI, Oct. 8 (SMM) - China’s State Council has formally approved the establishment of a free trade zone (hereinafter FTZ) in Shanghai that will trial innovations in three areas: finance, trade and investment, Shanghai Metals Market (SMM) has learned from FTZ authorities.

 The FTZ will be 28.78 square kilometers in total area and encompass existing bonded zones in the city, including the current Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.

A key innovation in the FTZ will be a Free Trade Unit system comprised of Free Trade Accounts (hereinafter FTA), allowed to be opened by the Shanghai branches of five Chinese banks: Bank of China, Bank of Communications, Commercial and Industrial Bank of China, China Merchants Bank and Shanghai Pudong Development Bank.

Once the five banks complete setting up their FTAs which will transact both onshore and offshore RMB, they will have to close their on-shore RMB accounts as per requirements from People’s Bank of China, the main government body orchestrating the FTZ.

In addition, the FTAs will transact both RMB and foreign currencies with RMB being freely convertible, into other currencies. Yet convertibility the other way around – foreign currencies into RMB – will be limited in the FTAs, with rules yet to be enforced later on.

Among others, private equity firms with the intention to invest overseas stand to benefit most from this financial innovation of the FTZ, SMM understands.

Other financial innovations will pertain to accelerating reforms of financial institutions. More specifically, launching international boards by Shanghai Stock Exchange and Shanghai Futures Exchange, listing currency futures by China Financial Futures Exchange, and expanding the country’s fledging Over-the-Counter Bulletin Board. 

Other policy innovations

Market talk has it that the FTZ will bring Shanghai into direct competition with Hong Kong as it seeks to serve as a same hub for offshore RMB and to provide the same services in the currency, bond and equity offerings, insurance products and trade settlement.

Beijing has already allowed the creation of one free trade zone experimenting with RMB internationalisation in the Qianhai area of southern city Shenzhen. The Qianhai zone now allows banks from Hong Kong to offer cross-border yuan-denominated loans to mainland companies in the zone. The Qianhai project is said to be a test for what can be done in Shanghai’s FTZ.

The first to be liberalized in the FTZ is believed to be lending and borrowing linked to international trade in goods. Competition between foreign and Chinese banks in a level playing field then will herald interest rate liberalization nationwide.

At the same time, the FTZ is expected to attract service industry companies to set up operations there, such as those from consulting, investment and asset evaluation sectors.

Capital account liberalization will be eventually trialed in the FTZ. RMB is currently convertible under the current account, the broadest measures of international trade in services and goods. But Beijing maintains tight restrictions on the capital account.

Impact on metals industry

Among base metals, financing deals using aluminium and nickel may catch up with those of copper, which have already matured in the past several years via existing bonded zones.

Processing trade companies from the metals industry are likely to benefit from tax advantages offered to resident firms. For instance, they may be entitled to import duty cancellation and income tax of only 15%.

Resident firms in the FTZ are also expected to be encouraged to use RMB widely in cross-border trade settlement for their imports and exports of metals and other commodities.