Global banks cautious on Shanghai free-trade zone

September 29, 2013 4:44 pm

Global banks cautious on Shanghai free-trade zone

By Simon Rabinovitch in Shanghai

Overseas banks have given Shanghai’s much-hyped free-trade zone a chilly reception – Sunday’s launch included just two branches of non-Chinese institutions. The slow start for the zone contrasts with the high expectations for its future, with analysts saying it could herald the most ambitious push for financial reforms in China in more than a decade. The Chinese government has declared that it wants to use the zone – a small 28 sq km sliver of Shanghai – as a test bed for policies from interest rate liberalisation to capital account opening.But the tepid reaction of foreign banks so far reflects widespread confusion about how the zone will operate, even as regulators have appealed for patience.

Citigroup and Singapore’s DBS are the only foreign banks that will begin operations in the new zone for now, Chinese officials announced after a ribbon-cutting ceremony.

A banking regulator familiar with the approval process told the Financial Times that very few applications had been submitted and virtually all of the banks that had applied were accepted.

“Many banks have made enquires but they are still trying to understand what the zone will involve and whether it is worth setting up a branch there,” the regulator said.

The highest-ranking official at the launch ceremony was Gao Hucheng, China’s commerce minister, suggesting that the government is wary of overplaying the zone’s significance. Li Keqiang, the premier, has advocated using the zone as a laboratory for reforms, fuelling expectations that he would attend its opening.

Many of the specific policies for the zone are still being debated. At a news conference, Liao Min, head of the Shanghai arm of the China Banking Regulatory Commission, said the government would adjust the regulatory standards applied to banks in the zone to give them a freer hand to operate, while also ensuring that external risks would not spread to China.

A foreign banking official told the FT last week that international banks had been confused about whether to apply to establish subbranches connected to their existing Chinese operations or to incorporate entirely new subsidiaries. In the end both Citi and DBS received approval to establish subbranches.

The securities regulator said it would allow parent companies of branches based in the free-trade zone to issue bonds in the domestic Chinese market, something that has happened only rarely in the past.

Chinese officials said on Sunday they would soon publish a keenly awaited “negative list”, establishing which business lines will be closed to foreign companies in the zone, while all others will be open. The move is expected to give foreign investors much more freedom. Dai Haibo, a Shanghai government official, said that companies in the free-trade zone would receive business licences in as little as four days, down from the 29 days it normally takes now.

Mr Dai also called for patience. “It’s our first time using a negative list and we will encounter lots of new problems,” he said. “This is a pilot programme, and we need to give it time.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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