Shanghai’s MNC policy reveals RMB convertibility plans

Author: Ashley Lee | Published: 18 Oct 2012
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Multinationals have further incentive to move their regional headquarters to Shanghai under new rules released by the city’s Ministry of Commerce. The rules also signal new measures for RMB convertibility.

Shanghai has been competing with Beijing and Hong Kong to become Greater China’s financial hub. Sources said China must implement the rule of law before Shanghai reaches its full potential, but the new rules may attract multinationals looking to build closer relationships with the country.

The rules are a step towards the Shanghai 2020 plan, which aims for the city to become Asia’s financial centre by 2020.

“In the last 10 years, MNCs have started to look to Shanghai to not only set up their China headquarters but also regional headquarters given the size and increasing strategic importance of the China market,” said Hubert Tse, a Shanghai-based partner with Boss & Young.

Although this is not the first set of policies designed to attract multinationals, it includes several particularly appealing provisions. Regional headquarters that move to Shanghai will receive a launch subsidy of CNY 8 million ($1.27 million) in the first three years, and there are less-stringent visa requirements for senior executives.

Mark Schaub, Shanghai-based partner at King & Wood Mallesons, said that a larger change seems more subtle: the rules introduce more flexibility in approving MNC headquarters. “The authorities have been given leeway to approve provided requirements have been basically fulfilled. This will make it much easier in practice,” he said.

The most interesting provisions, however, relate to cross-border use of the yuan, although details have not yet been released. Those most interested in these new rules will be those with huge volumes of trade, such as mining and procurement companies.

Schaub added, “However, the regulations are unclear because the MNC’s headquarters in China will be a Chinese company. Instead, it may mean the parent company will have further access to RMB convertibility.”

He predicted that MNCs with regional headquarters in Shanghai will be able to utilize RMB for cross-border use, perhaps in pilot programmes for companies that have shown a commitment to investing in China.

Tse agreed that these provisions could foreshadow the implementation of the internationalisation of the RMB. This includes the proposed launch of the Shanghai International Board, on which international companies will be able to list in Shanghai.

“Although we haven’t yet seen the rules, it may be that when MNCs are allowed to list and raise RMB in Shanghai, the companies will be able to remit part of the RMB proceeds offshore: it could well represent a scheme to encourage investors to invest in this new RMB asset class,” said Tse.

Shanghai, Hong Kong or Beijing?

Shanghai, Hong Kong and Beijing are competing for regional headquarters. Although Hong Kong is considered the gateway to China, Shanghai and Beijing are making inroads.

Tse said that MNCs would choose Shanghai as their China or regional headquarters as it is the commercial and financial centre of China, while others would opt for Beijing so they could be closer to the government and regulators. An in-house lawyer agreed, noting that the choice is also sector-specific: government-backed industries such as IT may prefer to be located in Beijing.

“Hong Kong will probably play a lesser role in connecting China and the rest of the world going forward, with Shanghai, Beijing, Shenzhen and Guangzhou are all competing to fill that role,” said Tse.

But he added that Hong Kong will maintain its unique position as an international financial centre. It will continue to serve Chinese and global investors due to its well-established legal system, convertible currency, and culture and language which are different from mainland China.

Schaub was less optimistic about Hong Kong’s future, saying that Shanghai is clearly encroaching on its territory and that it is becoming more niche.. However one of Hong Kong’s biggest advantages over Shanghai is that it is more attractive from an income tax perspective for companies employing highly-paid people, such as in private equity.

Shanghai is also becoming more ambitious about its position in Asia, Schaub observed. In the past, Shanghai’s rules were primarily viewing China headquarters, but the more expansive wording looks to Asia, Asia-Pacific and even larger regions.

He commented, “Shanghai authorities want the city to be more than just a company’s China headquarters: now they’re looking at the region, maybe even more.”

See also:

‘Is Hong Kong the financial hub of the future?’

‘Shanghai and Singapore as competitors’

IFLR is holding its eighth annual Asia Capital Markets Forum on November 15 at the JW Marriott Hotel, Hong Kong. For full details see