Banking innovation takes the lead in Shanghai's FTZ reform

The banking sector of the China (Shanghai) Pilot Free Trade Zone has reaped the maximum benefit from a slew of policies since the establishment of the zone in 2013.

China has been actively working toward full-yuan convertibility that will grant greater flexibility to Chinese investment overseas. 

In Shanghai FTZ, the free trade account functions as an instrument in piloting the country’s capital account conversion in a risk-controlled environment.

The past four years has witnessed a wider convertibility of yuan and in cross-border payment. By the end of July this year, the outstanding cross-border yuan settlement within the zone had reached 673.6 billion yuan (US$101.2 billion), accounting for almost 60 percent of the city’s total volume, according to the Shanghai Financial Services Office.

Nearly 700 enterprises have used the two-way cross-border yuan capital pool service. A total of 68,700 free trade accounts had been set up by the end of July, with the transaction volume reaching 4 trillion yuan since the beginning of 2017, the regulator said.

As of 30 June, there were 477 banking establishments in the region and the outstanding foreign loans surged by 131 percent year on year, far exceeding the average loan growth rate of 14.5 percent. The ratio of non-performing loans in the area was 0.58 percent during the same period, much lower than the nation’s average level, data from the Shanghai Bureau of the China Banking Regulatory Commission revealed.

On its fourth anniversary, the FTZ received a big birthday gift after Aland Group, a Jiangsu-based healthcare enterprise, became the first international company to implement the functions of a global treasury center under the advanced cross-border pooling program led by Citi China.

This new structure is an expansion of the free trade account initiative to implement the People’s Bank of China’s policy and expand the financial service functions and support technological innovation and economic progress in the zone.

Foreign-funded banks enjoy unique advantages while carrying out businesses in the pilot zone. Owing to its vast cash management network spanning over 160 countries, Citi China’s annual settlement volume of cross-border pooling ranked at the top among the 29 Chinese and foreign banks.

“About 45 to 50 percent of our clients in the zone are multinational companies who crave for better internal capital efficiency, while the small- and medium-sized local companies tend to seek more tangible benefits like yuan-foreign exchange trading,” Cline Zhang, branch manager of Citibank (China) Shanghai Branch, told Shanghai Daily.

“Citi China regards its FTZ sub-branch as an ‘internal test field,’ whose fruits have been replicated and promoted nationwide,” Zhang added.

To provide better cross-border financing options for Chinese firms venturing abroad, United Overseas Bank China has launched a credit facility with a locally-headquartered private conglomerate via its FTZ sub-branch’s free trade accounting unit. Through this arrangement, the offshore borrower can get the loan directly from the onshore lender and enjoy convenient banking services like account opening, loan application and legal documentation.

By adhering to the concept of serving real economy, the Shanghai branch of the Industrial and Commercial Bank of China has created more than 20 innovative businesses tailored for the zone-based enterprises.

ICBC set up the first fully functional cross-border two-way yuan pool this June to facilitate one subsidiary of the RT-Mart International, a Taiwan-based hypermarket chain.

"With this innovative measure, enterprises can select whatever currency they like from the pool for cash concentration, and thereby reduce the exchange cost," said Qiu Yanling, head of correspondent banking division of the international banking department of ICBC's Shanghai branch.

Relying on the free trade account platform, the bank has been involved in a number of overseas syndicates, and provided financial support for large cross-border merger and acquisition deals totaling more than 10 billion yuan.

To help reduce the financing cost of the enterprises and ensure the convenience of finance for real economy, the Agricultural Bank of China’s Shanghai branch established fund-financing channels by using its right to independent pricing for loan interest rate. By the end of May, 56 core clients of the bank were granted credit with outstanding loans amounting to 39.6 billion yuan.

By applying block chain technology to free trade account remittance, China Merchants Bank helped one of its foreign clients to make cross-border HKD payment from a free trade non-resident account in the experimental area to a Hong Kong account.

China Everbright Bank’s Shanghai branch keeps providing comprehensive financial services to their customers in the zone by introducing and improving its “sunshine free trade" product system covering settlement, financing, investment and financing, treasury trading and online banking. By the end of 2016, there was a nine-fold year-on-year growth of its customers under the separate accounting unit and the total accounts soared by 15 times annually.

Shanghai HuaRui Bank, the first local private bank which was set up in 2015, has been focusing on exploring the segmented markets of serving the small and micro public. The lender has introduced “three exemptions and three half reductions” preferential policy to those companies registered in the zone.

“With a clear and differentiated strategy, we are banking on our business in the free trade zone, online finance and lending to high-tech start-ups,” Xie Qiang, vice president and chief risk officer of the bank told Shanghai Daily.