By Li Hongmei
China will allow unfettered exchange of its currency in its first free trade zone in Shanghai in a bold push to reform the world's second largest economy.
The free trade zone is intended to make Shanghai a true international trade and financial center.
According to a draft plan, the zone goes beyond greater liberalization of trade to take in investment and financial services, including free convertibility of currency.
Convertibility of the yuan - allowing the currency to be freely bought and sold, and with it the movement of funds into and out of China - is the main obstacle preventing Shanghai from competing with global financial centers such as New York or London.
The government keeps a tight grip on the capital account - investment and financial transactions, rather than those related to trade - on worries that unpredictable inflows or outflows could harm the economy and reduce its control over it.
But companies in the zone will have the freedom to trade the yuan, according to the plan.
"Under the pre-condition that risk can be controlled, in the zone convertibility of the renminbi on the capital account will be conducted, the first to carry out and test (it)," the draft plan said.
The yuan has so far only been convertible for trade - to buy imported goods or turn revenue from exports back into local funds.
A government official familiar with the plan said companies registered in the free trade zone could open special accounts to freely exchange yuan, but with only a few exceptions they would be required to close their onshore Chinese accounts.
Under the draft plan, the zone would let interest rates be set by the market. China currently fixes deposit rates by administrative order, but the central bank began allowing banks to decide their own lending rates in July.
According to the Ministry of Commerce, the zone groups four existing areas in Shanghai: an international airport, deepwater port, a bonded zone and a logistics area.
The draft plan said the zone would "support" establishment of foreign and joint venture banks and welcome privately funded financial institutions.
The project as a whole "will be a bold step to escalate China's economic development to the next level," ANZ Banking Group said in a research report this week. "Its success could be a model for the next stage of China's economic reform, opening up and capital account liberalization." But it warned of an increased risk of large capital flows.
For trade, the government envisions making the zone a center for cross-border e-commerce transactions, a plan which may require cooperation with a payments provider, officials said.
The zone would create a platform for trading commodities such as metals, energy and farm products, and gradually allow foreign companies to directly trade commodities futures, according to the draft plan.
The State Council gave the go-ahead for the zone in August and details will be announced after the "overall plan" is approved on September 27, officials said. The National People's Congress (NPC) will have to approve rules for the zone at its annual meeting next March.
