China's free trade zones will strengthen capital flows

Subject

China's 'free trade zones'.

Significance

China last month formally announced details of three new 'free trade zones' (FTZs) modelled on the Shanghai FTZ introduced in 2013. The new FTZs are central to the long-term plan for China's economy to pursue domestic reforms and manage balance of payments pressures. As China seeks to develop new domestic drivers of economic growth in advanced manufacturing, services and technology, the line trodden by financial policymakers between preserving centralised control of the financial system and increasing exposure to foreign financial actors is slowly but steadily tilting towards cross-border financial liberalisation.

Impacts

• Offshore and onshore renminbi markets will see greater convergence.
• State-owned banks will face greater pressure to reduce borrowing costs.
• The Shenzhen-Hong Kong stock connect will see greater flows of mid-cap equities trading.
• Speculative demand in mainland property markets will ease.