Bank Headquarters Publication [2014] No. 23

To Shanghai branches of the China Development Bank, policy banks, state-owned commercial banks, joint-stock commercial banks, and China Postal Savings Bank; Bank of Shanghai, and Shanghai Rural Commercial Bank; Shanghai branches of other urban commercial banks; foreign banks in Shanghai; village or township-level banks in Shanghai; and financial management companies, financial leasing companies, and auto finance companies in Shanghai:

According to the Opinions of the People’s Bank of China on Financial Sector Support for the China (Shanghai) Pilot Free Trade Zone (referred to hereafter as the “Opinions”), as approved by the headquarters of the People’s Bank of China (“PBC”), the Shanghai Headquarters of the People’s Bank of China (“PBC Shanghai”) has decided to remove the ceiling on small-amount foreign currency deposit rates in the China (Shanghai) Pilot Free Trade Zone (“PFTZ”), effective March 1, 2014, to support the steady liberalization of interest rates in the PFTZ. The decision is as follows:

I. Financial institutions shall reinforce the interest rate pricing mechanism for foreign currency deposits, and improve relevant management systems in accordance with the Opinions on Lifting the Upper Limit on Small-amount Foreign Currency Deposit Rates in the China (Shanghai) Pilot Free Trade Zone (see Annex).

II. Financial institutions shall establish risk prevention and management mechanisms, and file with the Currency and Credit Management Department of PBC their letters of commitment to risk prevention, risk self-assessment reports, risk management measures, and relevant supporting systems they have developed.

III. Financial institutions shall, apart from managing their foreign currency deposits in the PFTZ, establish a daily interest rate quotation system for foreign currency deposits; and fill in and submit to PBC Shanghai’s interest rate management system a monitoring form for their foreign currency deposit business on time. They shall promptly report to the PBC major adjustments to foreign currency deposit rates, substantial funds transfers, and any other major changes in connection with foreign currency deposits.      

IV. Financial institutions shall make efforts to prevent and control risks and make sure that their operations are consistent with policy requirements. PBC Shanghai shall establish a dynamic monitoring and inspection mechanism for better inspection of their operations. Any financial institution that fails to observe the aforementioned requirements shall be subject to an internal warning, a notice of criticism, forced rectification, punishment through macro prudential management tools, or even cancellation of business.  

Annex: Opinions on Lifting the Upper Limit on Small-amount Foreign Currency Deposit Rates in the China (Shanghai) Pilot Free Trade Zone

The Shanghai Headquarters of the People’s Bank of China

February 25, 2014

Annex

Opinions of the Shanghai Headquarters of the People’s Bank of China on Lifting the Upper Limit on Small-amount Foreign Currency Deposit Rates in the China (Shanghai) Pilot Free Trade Zone

Promulgated on February 25, 2014

Effective on March 1, 2014

Article 1 According to the Opinions of the People’s Bank of China on Financial Sector Support for the China (Shanghai) Pilot Free Trade Zone (referred to hereafter as the “Opinions”) and the general requirements of the People’s Bank of China (“PBC”), the Shanghai Headquarters of the People’s Bank of China (“PBC Shanghai”) has decided to remove the ceiling on small-amount foreign currency deposit rates in the PFTZ, to support the steady liberalization of interest rates, promote the development of interest rate pricing mechanisms for foreign currency deposits, and improve the market-based interest rate setting system in the PFTZ. This pilot program for interest rate liberalization is designed to accumulate some replicable experience for further reforms.

Article 2 Following the removal of the upper limit on small-amount foreign currency deposit rates, financial institutions in Shanghai may exercise discretion in setting interest rates for foreign currency deposits made by the PFTZ-based residents. The PFTZ-based residents shall refer to enterprises and institutions (including financial institutions) incorporated in the PFTZ by foreign or Chinese legal persons in accordance with law; organizations that are registered in the PTFT but that have not yet obtained any legal person status; business units set up by overseas institutions in the PFTZ; and Chinese individuals that have been employed in the PFTZ for over a year.  

Article 3 Financial institutions shall focus on building and improving their capacity for independently setting proper interest rates for foreign currency deposits based on market supply and demand, impose more rigid financial restrictions, and provide further differentiated services. They shall establish sound and appropriate strategies and models for the setting of interest rates, and develop management measures accordingly. Their interest rate setting models shall adequately reflect the cost of capital, operating expenses, customer profitability, as well as risk premiums, so as to provide an effective basis for differentiated and refined pricing.

Article 4 Financial institutions shall establish an interest rate risk management system for foreign currency deposits in the PFTZ. The system shall include risk management goals, methods for assessing interest rate risks, interest rate risk limits, stress test tools and risk management measures.

Article 5 Financial institutions shall closely monitor the movements of interest rates and exchange rates in domestic and international financial markets; properly predict the trends of foreign currency interest rates; make sound assessment of the potential impacts of changing spreads of interest rates inside and outside the PFTZ on foreign currency capital movement; and prepare response plans for interest rate fluctuations.

Article 6 To open an account, resident enterprises in the PFTZ shall present valid registration documents, while the PFTZ-based individuals shall provide in-service certificates issued by their employers. Financial institutions shall establish detailed rules for screening the qualifications of potential customers, as well as strict standards for opening accounts, to prevent illegal fund transfers and arbitrage through accounts under false identities in the PFTZ.

Article 7 Financial institutions shall establish mechanisms for the monitoring and analysis of foreign currency deposit rates in the PFTZ; fill in the Monitoring Form for Foreign Currency Transactions in the PFTZ available at the interest rate management system of PBC Shanghai and upload the completed form onto the same system without any delay; track and analyze any suspicious transactions; and submit monitoring reports accordingly.

Article 8 Financial institutions shall file with PBC Shanghai their management measures in a timely manner, including measures for setting foreign currency interest rates, risk management systems, and risk monitoring and analysis mechanisms.

Article 9 PBC Shanghai shall closely track and analyze the movements of foreign currency interest rates inside and outside the PFTZ, predict market trends, and use a combination of tools for risk prevention, to protect the reform from systemic risks.

Article 10 Financial institutions shall make efforts to prevent and control risks and make sure that their operations are consistent with policy requirements. PBC Shanghai shall establish a dynamic monitoring and inspection mechanism for better inspection of their operations. Any financial institution that fails to observe the aforementioned requirements shall be subject to an internal warning, a notice of criticism, forced rectification, punishment through macro prudential management tools, or even suspension of business.