The central bank has eased foreign exchange controls in Shanghai's free trade zone, including cutting red tape for foreign direct investment as part of efforts to pilot capital account convertibility.

Investors can now register FDI-related foreign exchange activities with banks instead of regulators, and can make settlement of foreign exchange capital without submitting proof of use of funds in advance, the Shanghai headquarters of the People's Bank of China said in rules released yesterday.

Foreign investment companies can open a corresponding yuan account for each of their foreign exchange capital accounts, and use funds in the yuan account to pay for legitimate deals.

The move could give investors more freedom in managing their cash and avoiding exchange rate risks.

The measures are contained in a 60-page document outlining foreign exchange management rules in the zone to support cross-border trade and investment.

"They are by far the most detailed and comprehensive rules in reforming the foreign exchange system. They are of milestone significance," said Zhang Xin, deputy director of the Shanghai headquarters of the central bank. "We will make more specialized details in terms of capital account convertibility."

The release of the new rules marks the start of capital account convertibility reforms in the zone, and the authority aims to cut administrative procedures, enrich the zone's economic functions and enhance risk management, Zhang said.

Other new measures released yesterday include lifting the ceiling of foreign exchanges that companies registered in the zone are allowed to allocate in an overseas subsidiary.

Approval procedures are simplified and more companies are allowed to conduct cross-currency cash pooling to attract more multinationals to set up headquarters in the zone.

Leasing companies are allowed to directly take foreign currencies as rent.

Promoting yuan convertibility under the capital account is considered a crucial step in realizing the central bank's ambition to make the yuan one of the world's major reserve currencies.

A blueprint for financial reforms in the free trade zone released last December envisioned that companies would be allowed to directly convert the yuan into foreign currencies for any overseas direct investment without prior approval.

The authorities will also open up the domestic securities market to foreign investors and vice versa.

Yesterday's document is the fourth the Shanghai headquarters of the central bank has released in the past two weeks detailing operational requirements for new financial measures.

Earlier this week, the central bank set rules for companies in the zone to borrow yuan from offshore, and it has fully liberated interest rates for saving and lending foreign currencies.

Tu Guangshao, vice mayor of Shanghai, said the city will release more policies to support financial reforms in the free trade zone later this month.

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