The Shanghai Free Trade Zone could prove a game-changer for foreign banks that are struggling in China by creating an offshore financial market where they can put their expertise to good use, according to a leading domestic economist.

"Eventually, all kinds of financial transactions that can be conducted in the international market will be permitted for banks inside the Shanghai FTZ," Lian Ping, chief economist with the Bank of Communications, told China Daily by phone.

"The area will be an offshore financial market where they can do business with the entire world," he said.

A number of domestic and foreign financial institutions are reportedly eager to set up shop in the 28.78-sq-km zone, which is expected to be officially unveiled on Sunday. It is being billed as a test bed for financial reforms that will later be applied more broadly in China.

Shanghai Pudong Development Bank already has three branches in the FTZ area but it plans to upgrade these and put them under the direct management of its head office. Bank of China has also applied to upgrade it branches in the area.

Meanwhile, foreign players like BEA, Citigroup, HSBC and Standard Chartered are closely watching to see what business opportunities emerge in the FTZ.

Lian said the zone will lure new players to the Chinese market, including those funded by private capital - although the latter will only be allowed to conduct offshore business initially.

"Competition will be fierce because financial institutions will rush into the area with a range of innovative products," he said.

Pundits predict that the first set of guidelines for the FTZ, set to be released this year, will contain few reforms. But they will soon expand "because only by opening up the financial market will the FTZ achieve its original intention," Lian said.

"Although there won't be too many breakthroughs at first, we will see new ways of doing old businesses," he added.

As an offshore financial market, the FTZ will remove both the ceiling on deposits for banks and the cap on loan interest rates, he said. The cap is currently set at four times the benchmark rate set by the People's Bank of China.

The loan-to-deposit ratio, which stops commercial banks lending over 75 percent of their total deposits, may also be relaxed, he forecasts.

"Foreign banks will become more competitive in the FTZ because they are already familiar with this kind of playing field," he said.

Foreign banks have been faltering in China because of their limited access to depositors, small branch numbers, and the impact of the strict loan-to-deposit ratio.

weitian@chinadaily.com.cn

(China Daily 09/27/2013 page17)