Capital controls liberalisation continues in Shanghai free trade zone

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/08

​The People’s Bank of China has given firms and banks in the Shanghai Free Trade Zone (SFTZ) permission to seek funding from abroad without the need for a prior permission from the central bank or being subject to rules on loan length or currency. Additionally, the ceiling on foreign financing has been raised. At current interest rates, a foreign loan is cheaper now than a domestic loan. However, under the old rules, companies in the SFTZ tended to borrow very little from abroad, even if Chinese firms have generally been eager to get foreign financing. The new rules continue to limit the use of this financing channel.

The first full year of operation for the SFTZ, which was established in autumn 2013, has been disappointing for most firms. Deregulation of capital movements is still in midstream; use of the yuan in international transactions other than foreign trade is still forbidden and the deregulation of interest rates for yuan deposits has not proceeded as planned. Nevertheless, the SFTZ has seen reforms that make it easier for firms to deal with the rest of the world. At the end of January, the government agreed to extend certain eased restrictions in the SFTZ to the rest of the country. Their impacts will be limited, however.

Three new Shanghai-style free trade zones (Guangdong, Fujian and Tianjin) were approved last December. These new zones will also facilitate business between mainland China and the rest of the world. The new free trade zones should be operational next month, bringing new competitiveness and dynamism to China’s reform policies and opening up to the world. 

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