China Moves Toward Allowing More Yuan Loans From Overseas

China has allowed companies in the Shanghai Free Trade Zone to borrow yuan from overseas as a similar pilot area in Shenzhen plans to broaden sources for such loans, in the latest steps to expand global use of the country’s currency.

The People’s Bank of China 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 yesterday. 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 yesterday.

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 yesterday 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 Jan. 27.

‘Very Cautious’

“The PBOC remains very cautious and decides to liberalize the capital account items gradually in the FTZ,” Liu Li-Gang, an Australia & New Zealand Banking Group Ltd. economist, wrote in a note to clients yesterday 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 Plc’s China unit, said in a statement. “China continues to rise as a world economic powerhouse, and the RMB is fast developing into a global currency for trade and investment.”

Yuan-Denominated Trading

Industrial & Commercial Bank of China Ltd., 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 Feb. 20.

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. Individuals in the zone can open settlement accounts to pay or receive yuan in cross-border transactions under the current account, according to yesterday’s PBOC statement.

Qianhai Zone

Qianhai, the 15-square kilometer special zone on the west side of the southern city of Shenzhen near Hong Kong, was previously picked as a testing ground for cross-border yuan loans, in which 15 banks based in Hong Kong provided about 2 billion yuan to companies in January 2013.

Loans in the district by foreign banks cannot be used in equity and derivatives investments, according to the document. The zone is also applying to the central bank and State Administration of Foreign Exchange to allow hedging exposure created by currency convertibility in domestic and foreign markets, including derivative trading in overseas financial markets and the domestic inter-bank market.

— With assistance by Jun Luo, Helen Sun, and Alfred Cang

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