In a policy breakthrough, Shanghai’s party chief announced yesterday that the city’s free trade zone intends to enable Chinese citizens to directly invest overseas for the first time.
“One of our key objectives is allowing qualified individuals within the free trade zone to open capital accounts in a gradual and orderly manner, on condition of good risk control,” Han Zheng, who serves on China’s politburo told the Financial Times in a report published today.
Although the policy-maker did not give specifics on implementation, the new development could remove important regulatory obstacles currently preventing wealthy Chinese from investing in foreign real estate and other assets.
Opening Up China’s Capital Accounts
Even before its formal opening in September last year, Shanghai’s pilot free trade zone (FTZ) was seen as a doorway for freeing up the country’s capital accounts, which have long been restricted by foreign exchange rules that prevented full participation on the world economy by both companies and individuals.
In July the FTZ served as the home for a new billion dollar cross-border investment fund set up by a consortium of Chinese and US financial firms.
That fund, which was set up by Rosemont Seneca Partners and Thrornton Group from the US with Chinese partners Bohai Industrial Investment Fund Management and Harvest Fund Management is using a company set up in Shanghai’s Pilot Free Trade Zone (FTZ) as a way to simplify access to foreign exchange.
Now Shanghai’s former mayor is opening the door for private individuals to gain the same easier avenue to overseas investment, but potentially on a much larger scale.
According to research by Forbes, China now is second only to the US in terms of the number of billionaires, with 152 private citizens holding assets of US$1 billion or more. With many more millionaires available with the capacity to invest overseas, and with China’s own real estate market slowing down, the Shanghai FTZ could be an investment vehicle for these Chinese ultra-high net worth individuals.
FTZ Could Become Relevant Again
The announcement by Han Zheng could also become a lifeline for the FTZ, as the once-heralded economic experiment had lately become the butt of jokes.
Once seen as a pioneer in economic liberalisation, the lack of real change in Shanghai’s FTZ had led most foreign investors to shun the once-promising zone.
However, with domestic investors still restricted in their access to investment opportunities apart from China’s notoriously volatile stock markets, or the increasingly discouraging housing market, transforming the FTZ into a funnel for outbound deals begins to make sense.