(Yicai) June 19 -- Since the reform and opening-up period, China’s offshore financial sector has continuously grown, creating a need for innovation in the offshore financial system and the establishment of a more robust framework.

China’s exports account for about one-seventh of the global market and its outbound foreign direct investment was second only to that of the United States last year. With the rise in transaction volumes, offshore trade serviced by domestic financial entities has seen significant growth, spurring demand for offshore settlement functions.

As the Belt and Road Initiative progresses, investments and credit activities conducted in Chinese yuan are increasing daily, providing another source of demand for offshore financial services.

In emerging markets such as the Association of Southeast Asian Nations, Latin America, and along the Belt and Road, yuan acceptance is growing, and offshore economic entities have been increasing their yuan asset holdings. As of the end of the first quarter of 2023, foreign entities in China had CNY9.87 trillion (USD1.36 trillion) of yuan-denominated assets, including stocks, bonds, and deposits, some 3.4 times more they had at the end of 2013.

China needs to innovate and improve its offshore financial system. But due to the lack of consensus among various parties, there are certain difficulties in policy formulation.

Since the mid-1990s, four commercial banks in China have been conducting offshore banking operations. Due to regulatory bodies adhering to the principle of prudence, the scope of offshore banking operations is relatively limited, resulting in slower growth of offshore business.

Shanghai should play a pivotal role in the development of China's offshore financial industry. The city is one of the world's major international financial centers, boasting a relatively well-developed financial market system. It is also the largest trading center for yuan assets globally, featuring platforms for trading various products such as yuan stocks, bonds, and wealth management products.

Additionally, Shanghai is at the forefront of the development of pilot free trade zones in the country. In China, the innovation and institutional development of offshore financial services in most of the pilot FTZs are often based on the practices in Shanghai. In the 1990s, two banks set up offshore banking units in Shanghai, accumulating extensive business experience.

(The author is chairman of the China Chief Economist Forum, and president of the research institute jointly established by Guangzhou Development District Holding Group.)

Editor: Tom Litting