The process helps improve the efficiency of funding management and settlement, thereby reducing funding costs and foreign exchange risks, said Kee Joo Wong, who heads the global payments and cash management operations of HSBC China.

Lenders have reacted positively to regulatory moves to further relax cross-border payments, including the announcement on Feb 18 that five Chinese payment firms may process cross-border yuan payments for trade transactions in the FTZ.

"These are all important steps to facilitate offshore treasury funding in renminbi," said one banker.

Shanghai FTZ 'negative list' may be cut by 40% to boost more interest

Shanghai FTZ sees more liberalization

While liberalized policies for the FTZ may bring more cash flows to the zone and opportunities for foreign lenders, regulators have been keeping a close eye on the risk management part of the equation.

The new measures in the FTZ reflect the philosophies and practices of market liberalization, and administrators will strengthen cooperation with their counterparts elsewhere to achieve effective controls against systemic and regional financial risks, said Zhang Xin, head of the PBOC's Shanghai branch.

One concern is that once policies are relaxed in the FTZ, significant amounts of depositors' money may shift toward the FTZ, and with the relaxation of foreign currency administration, exchange rates may become more volatile, said Zhang.

"I would like to re-address the role of financial reforms in the FTZ as a support to the development of the real economy.

"We do not wish to see wild volatility of cash flows in the FTZ ... We will pay close attention," said Zhang.

"We reckon trade freedoms will probably come first, followed by financial reforms involving interest rate liberalization and currency convertibility."

The authorities have emphasized that trials of financial reforms must be conducted under the condition of controllable risks, said Tommy Ong, executive director of treasury and markets at DBS Bank (Hong Kong) Ltd.

"This is the ultimate challenge because the government needs to effectively ring-fence capital flows within the FTZ under full currency convertibility under the capital account," said Ong.

 

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