Shanghai to test Cross-Border Trade in Yuan

In another historical step set to undermine the Hong Kong dollar’s role as China’s only open currency, the Shanghai Pudong Free Trade Zone has advanced new regulations allowing the yuan to be freely used in cross border financial products in a new pilot programme.

The People’s Bank of China will reportedly support Shanghai in exploring the unrestricted use of the yuan in cross-border trade and unlimited currency exchange in the city’s new free trade zone, the Pudong New Area, reported Citywire Asia in a news article, written by Peter Guy.

The ultimate objective for the free use of the yuan is to increase the willingness of foreign companies and investors to use the currency, and to create favourable conditions for overseas yuan to return to China for investment.

While Shanghai’s free trade zone has been approved and operating since 2013, rules guiding open currency usage has been its major impediment towards realising its full potential.

Currently, the yuan is convertible for trade purposes under the current account, which records the value of exports, imports and international transfers of capital. But it is not freely convertible under the capital account, which records the net flow of investment transactions into an economy.

The PBOC also established new policy guidelines for the Pudong New Area which includes innovating yuan-denominated financial products, expanding the opportunities for foreign financial products denominated in yuan, and exploring a foreign exchange futures trading pilot programme, among other things.

The QFLP (qualified foreign limited partnership) and QDLP (qualified domestic limited partnership) pilot programmes will feature no rules making it easier for foreign investors to utilise Chinese equity assets and domestic investors to invest in foreign assets.

Under the QFLP programme, foreign investors are allowed to buy shares in unlisted companies as well as participate in private placements by publicly traded companies, including private equity and venture capital products.

The QDLP system allows mainland investors to access stocks and bonds issued by private companies as well as invest in securities, commodities and financial derivatives.

On 15 July, the State Council announced China might allow foreign firms to invest offshore yuan via QFII. The trial would allow qualified foreign institutions to invest offshore yuan in Shanghai’s STAR Market.

The QFII system, introduced in 2002, presently only allows institutions to remit foreign currency to the Chinese mainland that can then be converted to onshore yuan for investment in China’s financial markets.

The new guidelines encourage the start of an international financial assets trading platform in Pudong. The trial is supposed to facilitate the process by which foreign investors can invest offshore yuan in the STAR Market through the QFII programme.

Regulators are also developing rules to allow foreign investors to invest in offshore yuan in the STAR Market outside the QFII rules.