Ranks of global headquarters set to increase

The Shanghai Free Trade Zone is expected to usher in pilot reforms of China's financial sector, and promote the development of its financial markets, thus further opening up the country to international financial markets. The FTZ will also serve as an attractive area for domestic and foreign companies to invest in.

It has been widely reported that economic reforms to be introduced in the FTZ will focus on gradually relaxing the convertibility of the yuan, among other financial innovations, as long as the attached risks are minimized.

Meanwhile, FTZ officials have mentioned at public events that foreign companies may be allowed to gradually participate in commodity futures trading, and overseas commodity exchanges to establish their own futures warehouses. Many reports have also surfaced predicting that the free convertibility of the yuan will begin on a corporate, rather than personal level.

The renminbi will probably be made fully convertible on a piecemeal basis - with one of the first steps being to encourage domestic capital to invest overseas. If the State Council, China's cabinet, approves the plan to make the Chinese currency fully convertible inside the FTZ, it will spell good news for both State-owned and private Chinese companies that have set their sights overseas.

Capital markets already have high expectations of the FTZ. Many hope to see foreign-exchange limits lifted and domestic companies issue bonds overseas, with financing also conducted through yuan-denominated loans overseas. Companies are also expected to be given a freer hand in using the relaxed currency rules to make investments, without requiring strict examination and approval from the State Administration of Foreign Exchange.

Traditionally, these companies required an overseas business management platform for their offshore financing and fund management, with Hong Kong, Singapore and some European countries proving popular setting-up destinations.

But if the FTZ can create conditions comparable to these overseas platforms, it will become an attractive destination for Chinese companies that are deciding where to set up their global headquarters.

The same logic applies to foreign companies. For many multinationals that operate in China and have their regional headquarters here, a relaxed financial and foreign-exchange environment would help them in terms of regional fund management and settlement issues.

At present, most multinationals only have headquarters for China here. They still prefer to have their Asia-Pacific headquarters in other Asian countries. Part of the reason for this is because treasury management, cross-border settlements and capital movements are restricted by China's strict foreign-exchange controls.

If capital-account regulations are eased or removed inside the FTZ, big multinationals will find their cross-border transactions become much simpler and more convenient to execute. Some may even consider building a cross-border capital management and settlement center in the area, thus enhancing the functionality and scope of their China headquarters.

Once this happens, foreign banks will inevitably want to set up branches in the area.

Under the current rules, it's extremely complicated for foreign banks to open up branches on the Chinese mainland. After setting up representative offices here, they must wait a minimum of two years before they can even apply to the China Banking Regulatory Commission, or CBRC, to upgrade the status of these to branches. They must also be able to show they had assets totaling at least $10 billion at the end of the previous year, and their capital adequacy ratio has to meet CBRC requirements.

In exploring the FTZ program, foreign banks may decide they cannot wait and establish a branch in the region even earlier. They could also receive licenses to conduct corporate or individual renminbi businesses after fulfilling the CBRC's criteria.

Overall, the news for foreign banks is good, even though specific details have yet to be worked out.