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Chinese officials often test complex reforms in smaller towns and localities before rolling them out on a national scale.Two such pilot reforms are being watched particularly closely.
Second are reforms aimed at expanding renminbi loans, which could go a long way in China’s attempt at internationalizing the yuan.
JPMorgan’s Jing Ulrich points out key reforms that have emerged in three Chinese cities:
The State Council selected Wenzhou as region for financial reform on March 28. Two key reforms being rolled out include a) allowing informal lending institutions to become rural banks b) allowing Chinese citizens to make direct investments abroad in non-financial companies. This is an effort to tackle the rampant shadow banking industry. There is however a cap of $3 million per project, per year or a total $200 million per year. From Ulrich:
“The major impact of the Wenzhou reform is to promote private participation in the bank-dominated financial system and to liberalize private capital outflows. There is, however, a lack of clarity in two important respects: 1) whether the new rural banks would have the ability to set their own interest rates, and 2) whether the biggest sole shareholder of the new financial institutions must be an existing banking institution, as required by the current policy.”
The Shanghai Municipal Office of Financial Services will allow qualified foreign limited partners namely overseas hedge funds, private equity and venture capital funds, to raise renminbi funds in China and invest it abroad. There is no fixed date for the launch of the Qualified Domestic Limited Partner (QDLP) initiative.
The Hong Kong-Shenzhen cross-border renminbi lending scheme has been submitted to the State Council for approval. This would essentially allow banks in both cities to lend renminbi directly to clients from both cities. This could bode extremely well for Shenzhen and its new economic zone, since lending rates in Hong Kong are much lower than on the mainland.
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