China leans toward allowing more yuan loans from overseas

The People’s Bank of China, or PBOC,set a limit on the amount firms and non-banking financial institutions inside the Shanghai zone can borrow based on their registered capital and an unspecified parameter that takes economic conditions into account, the Shanghai branch of PBOC said in a statement on its website.

The Qianhai district of Shenzhen will apply to the central bank by the end of June for permission to let foreign lenders offer yuan loans, according to an official local government document posted on the zone’s website.

China opened the Shanghai free-trade zone in September as a testing ground for reforms, with the Communist Party leadership pledging in November to accelerate convertibility of the renminbi, as the currency is also known, under the capital account. The policies announced build on the central bank’s opinion released in December. Qianhai will also apply to the central bank and the forex regulator by end-June to let residents and non-residents open domestic and foreign currency free-trade accounts with lenders in the zone, according to the document, drafted by the Shenzhen government and dated January 27.

‘Very cautious’

“The PBOC remains very cautious and decides to liberalise the capital account items gradually in the FTZ,” Liu Li-Gang, an Australia & New Zealand Banking Group economist, wrote in a note to clients about the Shanghai zone. The fact that the central bank will determine rules based on macro- prudential considerations indicates that it retains control against hot-money inflows, Liu said.

Borrowings in the Shanghai free-trade district can only be used for operations and project construction within the zone or overseas, and shouldn’t be invested in securities, including wealth management products, according to the statement. Companies in the zone are allowed to operate intra-group cross-border yuan cash pooling on a bilateral basis, it said.

“The new policy measures provide more detailed guidance for financial institutions to serve customers in China [Shanghai] Pilot Free Trade Zone, particularly relating to technical and operational aspects of RMB cross-border transactions,” Helen Wong, chief executive officer of HSBC Holdings’ China unit, said in a statement.

“China continues to rise as a world economic powerhouse, and the renminbi is fast developing into a global currency for trade and investment.”

Industrial & Commercial Bank of China, the nation’s largest lender, said in a statement that its Singapore branch lent 170 million yuan ($28 million) to two companies in the free-trade zone after receiving the rules on February 20.

The China Foreign Exchange Trade System will provide yuan- denominated financial asset trading services and support expansion of cross-border use of yuan, while Shanghai Gold Exchange will offer yuan-denominated precious metals trading, delivery and settlement in the zone and overseas, according to a document about the detailed PBOC rule seen by Bloomberg News.