Analysis of measures to enhance Shanghai's international financial center status

by Jenny Chu

On February 14, 2020, China issued the “Opinions on Further Accelerating the Construction of Shanghai's International Financial Center and Financial Support for the Integrated Development of the Yangtze River Delta” (“Opinions”).

The Opinions were officially approved by the State Council, and jointly issued by the People's Bank of China (“PBC”), the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, the State Administration of Foreign Exchange, and the Shanghai Government. The Opinions proposed a number of specific measures, including actively promoting the financial pilot of the Lingang New Area, accelerating the opening up of Shanghai's financial industry at a higher level, and supporting the integrated development of the Yangtze River Delta.

1.Actively promoting the financial pilot of the New Lingang Area

The Opinions pays great attention to key internationally competitive industries located in the Lingang New Area and shows its support for further international opening of these industries.

(I)According to Opinions, financing subsidiaries of qualified commercial banks are allowed to set up professional subsidiaries in Shanghai and to invest into the equity of key projects in Lingang New Area and Yangtze River Delta and the equity of unlisted enterprises under commercial voluntariness.

(II)The insurance institutions will be encouraged to invest in sci-tech investment funds or invest directly in sci-tech enterprises in Lingang New Area. Meanwhile, qualified commercial banks will be able to set up financial asset investment companies in Shanghai. Such financial asset investment companies will be enabled to establish specialized investment subsidiaries in the city, to participate in businesses such as corporate restructuring, equity investment and direct investment which are related to the construction of the Lingang New Area as well as the economic restructuring, industrial upgrading, and coordinated development of the Yangtze River Delta.

(III)The Opinions also reflect the government's efforts to promote investment and trade liberalization and facilitation. For instance, in accordance with related rules and market principles, financial institutions shall be encouraged to provide long-term credit funds for the development of high-tech industry, shipping industry, and other key industries in the  Lingang New Area.

(IV)The Opinions stated that the government shall support major scientific and technological innovation and R&D projects in the Lingang New Area as well as the development of new types of international trade. The establishment of fin-tech companies will also be supported. New technologies, such as artificial intelligence, big data, cloud computing and block chain, have also been attached great importance to the application in the financial field and the cultivation of fin-tech talents.

(V)In the Lingang New Area, for qualified enterprises, banks can directly handle the cross-border trade RMB settlement business and directly handle the cross-border RMB income from foreign direct investment, cross-border financing, overseas listing and other businesses to be paid and used in China, according to the enterprise receipt and payment instructions. The special RMB capital account for foreign direct investment will be canceled in the Lingang New Area. Eligible transnational enterprise groups will be allowed to carry out centralized adjustment and collection of surplus and shortage of local and foreign currency funds among their members at home and abroad, and the funds shall be converted according to actual needs. New regulations of cross-border transfer of pilot domestic trade financing assets will be conducted in the Lingang New Area. The business of cross-border transfer of trade financing assets will be handled through a new platform based on Shanghai Commercial Paper Exchange and related digital technology research and development to promote the development of RMB cross-border trade financing business.

2.Accelerating the construction of Shanghai's international financial center

Further opening up Shanghai's financial sector to a higher level is also a key point highlighted by the Opinions.

(I)According to the Opinions, under the premise of legal compliance and commercial voluntariness, qualified commercial banks can set up financial management subsidiaries in Shanghai, pilot foreign investment institutions and large banks to set up joint venture financial management companies in Shanghai. Commercial banks and bank financial management subsidiaries are encouraged to choose eligible asset management institution registered in Shanghai to serve as a financial investment cooperation institution.

(II)The Opinions also mentioned the foreign-funded institutions will get better support to establish or hold securities operation institutions and fund management companies to land in Shanghai. The Opinions also removed the limit on the proportion of foreign investment in life insurance allowing 100% foreign ownership in Shanghai.

(III)Foreign financial institutions will also be approved to invest in Shanghai to establish and participate in pension management companies. Insurance asset management companies can also set up professional asset management subsidiaries in Shanghai. Pilot insurance asset management companies can participate in overseas asset management institutions and other wealth management companies established in Shanghai. The government will explore insurance funds to invest in gold, oil and other commodities on a trial basis through Shanghai-related exchanges.

(IV)Qualified non-financial enterprise groups are allowed to establish financial holding companies in Shanghai. Multinational companies are encouraged to set up headquarter-type institutions such as global or regional fund management centers in Shanghai. The fund management center established by a multinational company in Shanghai can enter the inter-bank foreign exchange market for transactions upon approval. The financial lease parent companies and subsidiaries registered in the Shanghai Pilot Free Trade Zone are allowed to share the amount of foreign debt.

(V)The Opinions stated that bond market shall be more open to the world. It will be more convenient for foreign investors to register and enter the market to increase the types and amount of foreign investors. The government would like to promote the transformation of domestic settlement agent banks into custodian banks gradually and provide diversified services for overseas investors to enter the inter-bank bond market.

(VI)The market of RMB interest rate and foreign exchange derivatives will gain more importance. RMB interest rate options will be launched, and foreign exchange options and other products will be more diversified.

(VII)The management of exchange rate risks under financial investments by overseas institutions shall be improved to facilitate overseas institutions' positions resulting from investment in the domestic bond market to enter the inter-bank foreign exchange market.

(VIII)Overseas institutions will be allowed to sign the main derivatives agreements of NAFMII, SAC or ISDA to improve the efficiency of the connection between the Shanghai international financial center and the legal system of the international financial market.

(IX)In addition, there are certain measures on how to build an international financial business environment in Shanghai. Shanghai shall accelerate the development of financial rule of law as well as the establishment of a system of financial rules in line with international standards, and shall increase penalties for illegal financial activities and encourage pilot financial science and technology innovation. The financial court and the bankruptcy court in Shanghai should better conform to the development trend of the financial market, follow the high international standards, strengthen capacity building, improve the professional level of case adjudication, and enhance the international credibility and influence of case adjudication.

3.Supporting the integrated development of the Yangtze River Delta in finance

For the Yangtze River Delta, the Opinions highlighted three points:

(1)the cross-regional collaboration of financial institutions;

(2)better financial supporting services;

(3) the new mechanism for financial policy coordination and information sharing.

(I)For example, the Opinions put an eye on the level of cross-provincial mobile payment services in the Yangtze River Delta, and promote the connectivity of payments in public services in the Yangtze River Delta.

(II)The legal person banks in the Yangtze River Delta shall be connected to the special verification channel for personal bank account opening of legal and qualified clearing institutions, and mutual verification service should be provided for binding account information.

(III)The cooperation and coordination of the banking financial institutions in the Yangtze River Delta in project planning, project evaluation and rating, credit line verification, repayment arrangement, credit management and risk reduction are emphasized. Under the current policy framework, the Opinions support financial institutions to extend credit to "agriculture, rural areas and farmers" in the Yangtze River Delta, enterprises engaged in pollution prevention and control, science and technology enterprises, high-end manufacturing enterprises, small and micro enterprises and private enterprises by using re-loans and re-discount funds. Moreover, an integrated, market-oriented Yangtze River Delta credit investigation system will be completed in the future to provide professional credit investigation services to the society.

4.Supporting measure

The Opinions also mentioned safeguard measures related to the PBC.

(I)For instance, the headquarters of the people's bank of Shanghai could launch a pilot project to strengthen its ability to monitor payments and settlements.

(II)A database for reporting transactions in China's financial markets will be set up in Shanghai too.

(III)Finally, the Opinions make it clear that the financial policies that have been issued and will be issued in the pilot free trade zone, as well as the policies and measures to support the liberalization and facilitation of trade and investment issued by the state financial regulatory authorities are applicable to the actual situation in Shanghai, and priority should be given to pilot in Shanghai.

The Opinions is clearly committed to improving the financial position of Shanghai and the Yangtze River Delta. Related requirements may be further clarified by subsequent elaboration rules. It is anticipated that a series of new laws and regulations will be introduced to strengthen the financial internationalization and regional integration in Shanghai and Yangtze River Delta.