China to Back Shanghai’s Trial of Free Use of Yuan

China’s central bank will support Shanghai to take the lead in testing the free use of the yuan, explore unrestricted inflows and outflows of capital for cross-border trade and investment, and unlimited currency exchange in the city’s new free trade zone, an official said Tuesday.

The trial will take place in accordance with principles of anti-money laundering, anti-terrorist financing and anti-tax avoidance, Wang Xin, director of research at the People’s Bank of China (PBOC), said at a press conference.

China issued guidelines last week for development of Shanghai’s Pudong New Area into a test zone for socialist modernization. Pudong is to advance opening-up in the financial sector, including exploring the implementation of capital account convertibility, innovating internationally oriented yuan-denominated financial products, expanding the scope of foreign yuan financial products for domestic investment, promoting the cross-border flow of funds and exploring a foreign exchange futures trading pilot program.

Currently, the yuan is convertible for trade purposes under the current account, which records the value of exports and imports and international transfers of capital, but it is not freely convertible under the capital account, which records the net flow of investment transactions into an economy.

The free use of the Chinese currency is highly anticipated as the U.S. dollar is relative weak and international use of the yuan is still relatively low, a foreign exchange researcher at a big bank said. That isn’t in line with China’s economic status, the researcher said.

In promoting the free use of the yuan, the goal is to increase the willingness of foreign companies and investors to use the currency, including creating more conditions for overseas yuan to return to China for investment, several industry experts said.

Another highly anticipated area is the implementation of the Qualified Foreign Limited Partnership (QFLP) and Qualified Domestic Limited Partnership (QDLP) pilot programs, which make it easier for foreign investors to tap Chinese equity assets and domestic investors to invest in foreign assets, some industry participants said.

Under the QFLP program, foreign investors are allowed to buy shares in unlisted companies as well as participate in private placements by publicly traded companies, private equity and venture capital products. Under the QDLP system, mainland investors will be able to access assets such as stocks and bonds issued by private companies as well as invest in securities, commodities and financial derivatives.

The available QDLP and QFLP programs are still very few in Shanghai, a person at a big bank’s international department told Caixin. One client wanted to participate in such programs and eventually had to choose one in Ningbo, the person said.

In a document released in February, the Shanghai government vowed to further open up two-way financial investment with QDLP and QFLP pilot programs to accelerate building the city into a global asset management center.

As demand for yuan assets increases globally, there will be a rising need for talent in yuan asset risk management, the PBOC’s Wang said. Shanghai will become the center of yuan asset allocation, risk management, fintech and high-quality financial talent, Wang said.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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