On the morning of July 20, the State Council Information Office broke the news. In response to a reporter’s question, Wang Xin, Director of the Research Bureau of the People’s Bank of China, said, “The central bank will continue to support the construction of Shanghai as an international financial center, to further improve the financial market system, product system, institutional system and financial infrastructure system, and to strengthen global finance.” It supports Shanghai to take the lead in the free use of RMB, to further facilitate the in and out of corporate trade and investment funds, and to explore the free inflow of capital in the Lingang Special Area under the requirements of the three principles of anti-money laundering, anti-terrorist financing, and anti-tax evasion. This will help Shanghai become an important hub in connecting international and domestic markets.
Up until now, China has a tight policy on capital, except for when it comes to trade. People in the domestic financial circle have been waiting for the day capital policies are relaxed.
Brief introduction to capital and trade items
Capital items include deposits, stocks, bonds, etc. In simple term, it is a financial asset. The so-called capital account opening refers to the ability to transfer assets freely.
Trade items include trade, services, commodities, etc. Simply put, it is the product. The liberalization of the trade is due to the export-oriented economic structure.
The news of the central bank’s liberalization of capital items is exciting. The so-called “free inflow and outflow of capital and free convertibility” is to liberalize capital items. The Lingang Special Area of Shanghai will become the first area in the country to enjoy this.
The Lingang Special Area is in the easternmost part of Shanghai by the sea. The Lingang Special Area was originally a free trade zone, and Tesla’s Shanghai Super Factory is located in Lingang. In the future, Lingang will also become a special financial zone. It seems that good things are concentrated in Lingang.
Just last week, the “Opinions of the Central Committee of the Communist Party of China and the State Council on Supporting the Pudong New Area’s High-Level Reform and Opening up to Build a Leading Area for Socialist Modernization” was released, and Pudong New Area was given new major tasks for reform and opening up.
What benefits will the opening of Lingang capital items bring?
First, for some ordinary people, foreign exchange will no longer be subject to the annual cap of 50,000 US dollars in the future.
At present, personal foreign exchange in China is still capped at 50,000 US dollars per person per year. This quota is completely sufficient for ordinary people because it is impossible to have that much income in a year, but for some wealthy people, the $50,000 line is completely insufficient. If capital items are liberalized, they will directly benefit.
Second, domestic capital will be more free to invest overseas.
For a long time, domestic financial institutions who want to invest in overseas markets can only use restricted channels such as QDII. That makes it very inconvenient.
With the development of globalization, people’s horizons are gradually broadening, and the demand for the allocation of large-scale assets is also rising. The allocation of major types of assets must be cross-regional and cross-variety. If you are in a region where capital items are not open, you will not even have the prerequisites for the allocation of major types of assets.
In the past, people in China used various underground passages or other gray channels to move capital overseas. In the future, there’s no need for these underground activities, you move capital out in a fair manner.
Third, attract more international capital to settle in.
It is known that most of the FDI flowing into China comes from Hong Kong into the mainland. The reason why international capital takes Hong Kong as a springboard is mainly because Hong Kong’s capital items are open, and funds can flow in and out easily. International capital is afraid to enter the mainland market directly. Apart from policy restrictions such as equity ratio, the main reason is the inconvenience of access. Capital is very smart; therefore, it will not focus solely on profit without considering the risk. The lack of freedom of in the flow of capital is the biggest risk.
After capital policies are relaxed, more foreign capital will be attracted to invest in China. Moreover, according to the information disclosed this time, some previous restrictive policies on foreign investment will also be changed accordingly.
Fourth, it will contribute to the internationalization of the RMB.
Since Zhou Xiaochuan was the governor of the People’s Bank of China, the internationalization of the RMB has been proceeding in an orderly manner. In 2016, the official entry of the RMB into the SDR was a milestone moment for the internationalization of RMB. However, since then, the process of RMB internationalization has slowed down, and the biggest factor contributing to that is the various restrictions that capital items face. In the international community, no country will recognize a fiat currency whose capital items are not open to become an international currency.
Therefore, the relaxation on capital items is the prerequisite for the internationalization of the RMB. Otherwise, RMB will never be internationalized.
In the future, after the implementation of the policies, Shanghai will again become the first region to benefit from the new round of reform and opening.
If the round of reform and opening 40 years ago brought trade dividends, then this round of reform and opening will bring financial dividends. Shanghai will become an international financial center in the Asia-Pacific region.
It is foreseeable that with this round of policies, Shanghai’s development will accelerate again. After becoming a pilot open area for capital projects, funds, talents, etc., enterprises will inevitably be concentrated in Lingang. Just like the former Shenzhen Qianhai and Tianjin Binhai Development Zone, there will be many preferential policies.。
Chen Yin, Member of the Standing Committee of the Shanghai Municipal Party Committee and Executive Deputy Mayor, also pointed out at the meeting that Pudong’s development focus is to focus on “two special four districts, one center, the same board, and one guarantee”. The construction of special customs supervision areas will support Pudong in building the core area of Shanghai’s international financial center, trade center, shipping center, and international technological innovation center. It will build an international consumption center and create a model of urban governance that is livable and industrial. At the same time, it will establish and improve the rule of law guarantee system that is compatible with supporting Pudong’s “Bold Test, Bold Breakthrough, and Independent Reform”.
In the future, Pudong will have a series of reform policies that break tradition. These policies will bring new economic development momentum and Shanghai will be rejuvenated with new vitality.
Cong Liang, deputy director of the National Development and Reform Commission of China, said that Pudong will target the frontier areas of neurology and quantum technology.
The pilot relaxation of capital items in Lingang will become the central node of the entire Pudong plan, and all projects will require funding. How to revitalize capital through the characteristics of the pilot is an important issue that determines the outcome of the entire plan.
Shanghai has once again become a pioneer of reform and opening in the new era. The curtain of a new era has been raised. The last round of reform and opening created a round of Chinese miracles, and the new round of reform and opening will create new brilliance.