China to open up services, test freer yuan in Shanghai trade zone

SHANGHAI (REUTERS) - China will open up its largely sheltered services sector to foreign competition in a free-trade zone in Shanghai, and test bold financial reforms including a convertible yuan, the government said on Friday.

In a long-awaited announcement from its State Council, or cabinet, China said it will ease regulatory curbs for foreign investors to set up operations in the zone and free up controls on cross-border capital flows.

The announcement does not give a specific timeline for implementation of any specific reform, but said they would be carried out within the next two or three years.

State media has cautioned that the most dramatic financial reforms are unlikely to be implemented this year.

"As expected, the major focus, for the first phrase at least, is on promoting trade," wrote Frances Cheung, economist at Credit Agricole CIB, in a research note.

"We note that one thing that is relevant to the RMB is under point (2) where eligible Chinese banks in the FTZ are allowed to do offshore business, which is not the opening-up of the onshore RMB market as some might have looked for."

The China (Shanghai) Pilot Free Trade Zone is slated to open formally on Sunday, and China will suspend certain national laws governing the establishment of foreign businesses in the zone effective Oct. 1.

The document, published on the State Council's website Friday afternoon, largely conformed with an earlier draft document viewed by Reuters Friday morning but omitted a section proposing to allow the auction of "cultural relics" in the zone.

In addition to setting goals for improvements to financing, trade and governance, the document details initiatives covering 18 different industries ranging from shipping to insurance to education to foreign banks.

The document made no specific mention of allowing access to blocked foreign websites such as Facebook or Twitter from within the zone, despite widely circulated rumours in foreign media.

However, a clause did say foreign companies might be allowed to offer "specialised telecommunications services" within the zone, and that permission to offer services that break existing Chinese laws might be granted on a case-by-case basis by the State Council.

Economists have warned that while improving the environment for goods and services trade within the zone would be simple, deeper financial reforms would prove more difficult, both due to risks of uncontrollable arbritrage and internal political resistance.

"Capital account opening is very controversial in China," May Yan, an analyst at Barclays Capital in Hong Kong, pointed out.

"You have leading people, academic policy advisers, writing very publicly opposing this saying China isn't ready for this and doesn't need this."

This has not stopped investors from piling into real estate around the zone, driving up prices in some commercial properties by more than 20 per cent, said Michael Klibaner, head of China research at Jones Lang LaSalle.

Shares in companies expected to benefit from zone construction have also risen steadily since mid-August.