China's leading free trade zone faces currency risks and the authorities should be cautious in opening up the capital account, the Chinese Academy of Social Sciences (CASS), a top government think tank, said on Tuesday. "Foreign exchange risk is the biggest risk facing Shanghai's free trade zone," the think tank said in its "blue book" on the country's free trade zones, which was published on Tuesday.
Financial innovations in the free trade zone should be carried out in an orderly way on condition that risks are under control, the think tank said. China set up the Shanghai free trade zone in September 2013 as a venue to pilot economic reforms, in particular in the financial sector.
The government said in December it would allow limited convertibility of the yuan in free trade zones in Guangdong, Fujian and Tianjin, in a move to further liberalise its capital account after its currency was admitted to the IMF's reserve basket. But CASS said China must be cautious in opening up its capital account because "large-scale short-term capital outflows could hit China's financial system and the real economy". The yuan could face "malicious" short-selling by overseas investors if China rushes to make it convertible in Shanghai's free trade zone," CASS said. Foreign investors have grown increasingly concerned about Beijing's commitment to opening its financial markets after a series of heavy-handed government interventions in the stock and currency markets.
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