China has formally approved the establishment of a free-trade zone that will trial yuan convertibility in Shanghai, the official China Daily reported on Thursday.

State media had reported in early June that approval of the zone was imminent, but details were scarce on the precise nature of the policy initiatives being contemplated.

However, the report said the zone would also serve to concentrate logistics and communications assets and provide tax advantages to resident firms.

China's new leaders have signalled they want to quicken the process of making the yuan fully convertible over the next few years, as part of efforts to boost the currency's use in trade and support wider financial reforms.

But some economists are concerned that opening the capital account too quickly in the current unstable economic climate could lead to destabilising capital flight, complicating efforts to liberalise domestic interest rates.

Shanghai officials have been steadily lobbying China's State Council - the country's cabinet - for permission to open a pilot project to experiment with capital account liberalisation and yuan convertibility, concerned that the city could be left behind as rival financial centres, such as Hong Kong and Taiwan, move to develop cross-border yuan financial services.

Beijing has already allowed the creation of one free trade zone experimenting with yuan internationalisation in Qianhai, near the southern boomtown of Shenzhen and across from Hong Kong.

The Qianhai zone, which is administered by the People's Bank of China, now allows banks from Hong Kong to offer cross-border yuan-denominated loans to mainland companies in the zone.

The report said the new zone will encompass existing free-trade zones in Shanghai, including the current Waigaoqiao Free-Trade Zone, Yangshan Free-Trade Port Area and Pudong Airport Comprehensive Free-Trade Zone.

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