Foreign banks see poor payback from Shanghai FTZ
February 23, 2015 Category Finance, Weekly
Foreign banks betting on an early-mover advantage by rushing into the Shanghai free trade zone (FTZ) are looking at slim pickings and high costs as the reward for their haste. When the zone was launched in September 2013, the talk was of a mini-Hong Kong with zero tariffs that would attract a wide range of industries to set up in the 29 sq km zone carved out of a part of the Pudong area in Shanghai. For the banking sector, the headline promises were full convertibility of the yuan and a market-based interest rate mechanism to smooth cross-border capital and commodity flows. Banks are still waiting for those promises to be delivered. “This is the ‘China’ way – a launch that provides a high strategic framework, while all details are gradual to come,” Jack Chan, Managing Partner of Financial Services for Ernst & Young (EY) Greater China, told the South China Morning Post. Even though the latest changes allow foreign corporates registered in the zone to borrow up to twice the value of their registered capital and bypass the approval process that was previously required, the shift in the dynamics of offshore against onshore yuan borrowing rates has reduced the attraction of doing so. The latest data available shows companies in the zone have borrowed CNY19.7 billion from offshore banks in total, a tiny proportion compared with the total registered capital in the zone. In large part, that is because banks still do not have clear rules on whether the capital borrowed within the zone can be deployed freely elsewhere in the country. Rules establishing a banking firewall between the zone and the wider mainland China require each lender to set up an independent accounting system for their branches in the zone, adding about USD10 million to start-up costs for each bank branch in the zone, Chan said. The zone’s most notable achievement to date for the banking sector is cash pooling, but the launch of this service is seen by many as a qualified success at best, the South China Morning Post reports.
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