By Koh Gui Qing
BEIJING, March 15 (Reuters) - China has eased strictcross-border currency rules for 13 multi-national firmsincluding Samsung and Shell in a schemethat further cranks open its tightly controlled capital account,financial sector sources told Reuters.
The experiment, which has not been publicly announced by thegovernment, gives firms freedom to shift funds worth up to 30percent of their invested capital in China across its borders,bankers directly involved in the scheme said.
The move responds to growing demand from international firmsoperating in China for freedom to use soaring stores of yuan,also know as the renminbi, to boost the efficiency of theirmanagement of capital while keeping speculative pressure at bay.
"It's a way of opening up the capital account which helpscompanies deal with the real flows of the economy," MichaelVrontamitis, head of product management of transaction bankingfor East Asia at Standard Chartered in Hong Kong, told Reuters.
"Those are the real flows. These companies are notspeculating on the currency," said Vrontamitis, whose bank ishandling transactions for Shell under the pilot programme.
Six of the firms involved are foreign, eight companyexecutives and bankers with knowledge of the matter said. Theyare Shell, Samsung, Intel Inc, Alcatel-Lucent, Schneider Electric and Caterpillar Inc.
The other seven companies are Chinese state-ownedenterprises: Sinochem Corp, China Minmetals Resources,China Shipping Group, COFCO Group, Baosteel Iron &Steel, Shanghai Electric Group Co. andChina Eastern Airlines .
Some of the names of participating companies and banks havebeen reported in the Chinese media, but the full list has notbeen disclosed. The currency regulator declined to comment.
At least four banks, including Standard Chartered , HSBC , Citigroup Inc and Bankof China, will help Beijing run the test, called the"Foreign Currency Centralised Management Pilot", bankers said.
"This is meaningful even though it's just 13 companies. It'sa pragmatic approach in liberalising the capital account," saidZhang Zhiwei, chief China economist with Nomura in Hong Kong.
"They want to push renminbi internationalisation and to dothat, they need to get the renminbi somewhat convertible and thecapital account somewhat open."
BREAKING DOLLAR DOMINANCE
Reuters reported earlier this month that the People's Bankof China (PBOC) would use swelling foreign holdings of around 1trillion yuan ($160 billion) to help drive the relaxation ofcapital controls to make the currency basically convertible by2015 or 2020 at the latest.
China wants to break the dollar's dominance as the keycurrency for the settlement of international trade and to seethe yuan accepted as a reserve asset by global central banks.
Establishing the yuan as a reserve asset broadly requiresthe currency to be accepted as an international settlementcurrency, to be a store of value and to be freely convertible.
A fully convertible currency would also be an important stepin China's stated goal of establishing Shanghai as a bona fideinternational financial centre by 2020.
But while direct yuan settlement of cross-border trade hasclimbed to about 12 percent of China's total - around 2.9trillion yuan in 2012 - Beijing's campaign to gain greateracceptance of the renminbi as an international transactioncurrency has run into headwinds in corporate boardrooms, givenbarriers to trading and the costs of holding it.
The experiment - which began in December in Beijing andShanghai and is led by China's currency regulator, the StateAdministration of Foreign Exchange, which manages the country's$3.3 trillion foreign exchange reserves - is designed to address corporate reticence.
The pilot allows firms to join one of three test programmesthat simplify capital flows in and out of China.
One enables firms to "sweep" money in or out of China with aone-off approval from the regulator, instead of requestingapprovals for each transaction.
Another allows "cross border netting" so a company in Chinathat has lent to, or borrowed from, a firm outside China cansettle the two transactions on a net basis, instead of payingand receiving cash in two transactions on a gross basis.
A third test allows a unit of a firm to make payments orcollections on behalf of all other units, meaning a company with30 units in China can now use one bank account instead of 30.
Firms say freer flow of funds across China's borders boostsefficiency and cuts costs. Samsung said it expected to saveabout $10 million a year from participation in the experiment.
Although the test is not fully operational as some firms arestill ironing out details, positive feedback from others notpart of the experiment has led Beijing to start shortlistingparticipants for a second phase of the test, two bankers said.
OPENING UP
A PBOC study last year that measured China's capital accountopenness against the 40 items of convertibility tracked by theInternational Monetary Fund showed no item was fullyconvertible, economists from Citi said in a note this week.
But China has made repeated pledges to roll back capitalcontrols that are unmatched by other major emerging economiesexcept India, and are likely to be removed at a rising speed inthe next five years, the Citi client note said.
Indeed, Central Bank Governor Zhou Xiaochuan said at thebank's annual news conference this week that authorities wouldcontinue to push ahead with market reforms.
Sources have told Reuters that Zhou, originally slated forretirement, is set to stay on as the central bank's chief tofree and deepen China's financial markets.
Letting firms transfer cash in and out of China more easilyallows China to persuade companies to move their treasuryoperations to Beijing or Shanghai in future, bankers said,rivalling Hong Kong or Singapore as regional financial centres.
"One of the ideas is possibly to replicate the treasurycentre concept that is currently adopted in Singapore or HongKong," said Yigen Pei, head for transaction services for Citi inChina.