Some international analysts speculated in 2006 that China would tighten foreign investment controls, but the Chinese government insists that it is doing the exact opposite.

The China Banking Regulatory Commission (CBRC) announced on Sunday it had approved applications from nine foreign-funded banks to transform their Chinese branches into locally incorporated banks registered on the mainland. The move is seen as proof that the government is fulfilling its commitments to greater flexibility in the financial sector.

The nine banks, all to be registered in Shanghai, are the Standard Chartered Bank, the Bank of East Asia, the Hong Kong and Shanghai Banking Corp., the Hang Seng Bank, the Mizuho Corporate Bank, the Bank of Tokyo-Mitsubishi UFJ, the DBS Group, Citibank and the ABN Amro Bank.

The announcement followed the promulgation of new regulations on the administration of foreign-funded banks that took effect on Dec. 11, the fifth anniversary of China's accession to the World Trade Organization (WTO).

Under the regulations, China will allow foreign-funded banks to conduct Renminbi business for Chinese citizens in line with its commitments to the WTO.

No option but to open up

The foreign investors that arrived in China after the country began to open its doors nearly 30 years ago have now ventured out from the east coast to the hinterland and westernmost regions. Foreign funds have poured into a range of sectors, including high-tech, services, trade and banking.

Seven strategic sectors -- which include armaments, power generating and distribution, oil and petrochemicals, telecommunications, coal, aviation, and shipping -- remain only partially open to foreign investors.

State capital must play a leading role in these seven sectors, which are the vital arteries of the national economy and essential to national security, according to the State Assets Supervision and Administration Commission (SASAC).

Certain sectors -- such as national defence -- remain closed to foreign investors.

According to Ministry of Commerce figures, China used 48.576 billion U.S. dollars of foreign investment in the first ten months of the year, up 0.34 percent year-on-year. The country used 5.987 billion U.S. dollars in October alone, up 15.92 percent on last October.

At the Asia-Pacific Economic Cooperation (APEC) CEO Summit in Hanoi in November, Chinese President Hu Jintao said China would continue to reform and upgrade its economic system and open the country to the outside world.

Premier Wen Jiabao has said that just as the world needs China's dynamism and manufacturing strength, so China needs the outside world to develop, modernize and innovate.

Foreign media speculated that Hu and Wen's remarks were intended to ease foreign investors' anxiety. Now that its economy, the fourth largest in the world, is largely globalized, China has no option but to engage with international markets, increase direct foreign investment and develop advanced technologies. By doing this, China will be able to solve its domestic problems, including unemployment, wasteful growth that comes at a very high cost in environmental degradation and decreasing economic competitiveness.

Tianjin a guinea pig for bold new experiments

Back in the 1980s, China set up a group of special economic zones (SEZs) including the Shenzhen, Zhuhai, Shantou and Xiamen SEZs complete with preferential taxation and financial policies to lure foreign investors. These SEZs were China's first windows of economic reform.

In the 1990s the spectacular Pudong New District in Shanghai -- with its towering buildings -- rose to international prominence.

In 2006, the country began a bold new experiment in the Binhai New Area of Tianjin, just 120 kilometers to the southeast of Beijing.

The State Administration of Foreign Exchange (SAFE) has authorized a test of foreign exchange reform in the Binhai New Area, said city mayor Dai Xianglong.

"We will loosen controls over foreign exchange in capital accounts, and explore ways of making Renminbi capital accounts convertible in certain areas and up to a certain amount," said Dai, a former governor of the People's Bank of China, or central bank. "The government will improve the management of foreign exchange in current accounts, and gradually allow residents and enterprises to buy and sell foreign exchange on a voluntary basis," Dai said.

Experts believe that the new policies could herald a revolution in the country's foreign exchange regime. They speculated that China might accelerate efforts to loosen foreign exchange controls and promote free Renminbi convertibility.

Under the new policies, banks will be able to develop offshore finance facilities in Binhai, which will facilitate exchanges between foreign lenders, borrowers and investors.

The reforms mean that there will be no limit on the amount of foreign exchange that can be transferred between their headquarters and branches. The minimum threshold for shares held by individuals in foreign listed companies will also be lowered. Experts believe the measures will help ease pressure generated by China's massive 1 trillion U.S. dollar foreign exchange reserves, the largest in the world.

"With foreign exchange reserves swelling and pressure mounting on the yuan, China will loosen controls on foreign exchange and promote free conversion to the Renminbi," said Dai Jinping, director of the international financial research center at Tianjin-based Nankai University.

"To avoid risk, China must reform its foreign exchange regime step by step," Dai said. "Tianjin will be the guinea pig for the country's financial reforms."

The Binhai New Area, situated 120 kilometers to the southeast of Beijing and covering an area of 2,270 sq km, generated 160 billion yuan in gross domestic product in 2005.

China is endeavoring to turn the area into its third economic engine following Shenzhen and Shanghai's Pudong, the economic powerhouses of the country's southern and eastern coastal areas.

Three out of every ten Motorola mobile phones are produced in the Binhai New Area where the company has a huge plant.

Besides the financial reforms, the Binhai New Area will carry out reforms in government administration, deepen company reforms and in the fields of science and technology, land use and foreign-related businesses.

Pi Qiansheng, head of the management committee of Binhai New Area, is confident about its future. "Now that Binhai New Area is a key part of China's national development strategy, more and more foreign enterprises and banks will come here," Pi said.

Shanghai resolutely international

The Pudong New District in Shanghai, where 80 multinational corporations have chosen to set up their regional headquarters, is resolutely international in its outlook and not afraid to experiment.

The district, which covers an area of 570 square kilometers, attracted 3.888 billion U.S. dollars of foreign funds in the first ten months this year, one-third of the total inflow of foreign funds to Shanghai, according to local government statistics.

The district used 1.925 billion U.S. dollars of foreign investment in the first half of the year, up 25 percent year-on-year.

Analysts say that the reason foreign funds continue to wash into the district is because Pudong has adopted a series of flexible policies which offer foreign investors a positive investment environment.

This year Pudong scrapped the restriction that prevents foreign investors from holding more than 49 percent of a Sino-foreign joint human resources intermediate agency.

Pudong has also simplified customs declaration procedures, shortening waiting times for international goods and personnel in the district. "The move is welcomed by multinational corporations, " said Du Jiahao, secretary of the Communist Party of China in Pudong.

"What Pudong has done is to establish an economic environment that meets international norms and create a better investment environment to make it more attractive for foreign funds," Du said.

Pudong, which opened up to foreign investors in 1990, was listed by the central government as a test field for comprehensive reforms last year.

A white paper on the foreign investment environment in Shanghai shows that 90 percent of foreign businesses surveyed said Shanghai was their favorite investment destination on the Chinese mainland.

The white paper -- which covers topics such as the protection of intellectual property rights, the 2010 World Expo, comprehensive reforms in the Pudong New District and business costs -- was jointly compiled by the Shanghai foreign trade and economic cooperation commission and the municipal working committee for foreign investment in August this year.

The white paper reveals that more than 70 percent of the investors polled gave Shanghai a score of at least 80 out of 100 for its overall investment environment. And 45.1 percent saw government efficiency as the city's international competitive edge, with 56.8 percent and 69.5 percent, respectively, choosing labor force quality and infrastructure.

One of China's key financial hubs, Pudong is home to more than 380 Chinese and foreign financial institutions. The assets of the 59 foreign financial institutions in Pudong account for more than 60 percent of the assets of all foreign financial agencies in China.

More than 30,000 foreigners now work and live in Pudong, and parts of the area have become a genuine international community.

Source: Xinhua