Banners and advertisements of Chinese and foreign financial institutions in Shanghai. The planned pilot free trade zone in the city is attracting major foreign banks to set up branches there for a wider range of yuan businesses. [China Daily]

British banks HSBC Holdings Plc and Standard Chartered Plc are tipped to become the first two foreign banks to set up a presence in Shanghai's planned free trade zone, the first of its kind in China, sources said.

The two are likely to experiment with a wide range of yuan businesses in the FTZ's less-restrictive business environment, they added.

"We are closely following developments related to the Shanghai Free Trade Zone, and we are excited about the opportunities that the Shanghai FTZ will bring to our clients and customers," Standard Chartered said in an e-mailed statement to China Daily on Tuesday.

HSBC, another British bank that, like Standard Chartered, relies heavily on Asia-Pacific business, also expressed its interest in the pilot program.

"We are interested in a presence in the Shanghai Free Trade Zone," the bank said in an e-mail response.

The China Banking Regulatory Commission's Shanghai bureau has contacted a small number of foreign banks, including HSBC and Standard Chartered, to see how they want to operate in the FTZ, according to the South China Morning Post.

The CBRC sought feedback from banks in recent months, said a Shanghai-based senior executive at a foreign bank quoted by the Hong Kong-based newspaper.

"But banks are quite reluctant to invest a large sum of money in the zone, as details are still unclear and foreign banks as a whole are not making very good profits on the mainland," he added.

An official from the CBRC's Shanghai bureau said on Tuesday that it is working closely with government departments regarding details of the FTZ, but there's not been enough progress to warrant an announcement.

"We are committed to contributing to the further development of the Shanghai Free Trade Zone, by fully utilizing our expertise and international network. We don't comment on speculation regarding regulatory approval and decisions," said Standard Chartered.

The State Council, the country's cabinet, approved the establishment of a pilot FTZ in Shanghai in late August. Covering 28.78 square kilometers, the new zone will be built on the basis of existing bonded zones, including the Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.

"The Shanghai Free Trade Zone is a new step for China to further open up its financial sector and make the transition to services and consumption amid an economic restructuring. Therefore, many innovations and breakthroughs are expected," said Ding Chun, a professor with Shanghai's Fudan University.

According to Ding, by facilitating investment channels, lowering entry barriers for financial services and offering a level-playing field for private-sector companies and State-owned ones, the FTZ will be a bright spot for the financial hub of the world's second-largest economy.

"The pilot zone is a crucial move in adapting to global economic and trade developments and imposing a more proactive opening-up strategy," said a Ministry of Commerce statement, adding that it will help explore a new path for China's opening up, speed the transformation of government functions and promote economic restructuring.

In July, the SCMP reported that Beijing would allow foreign banks to set up wholly owned subsidiaries in the new zone. The move could cut years from the time foreign banks must otherwise spend before opening branches or subsidiaries on the mainland.

According to the report, lenders in the zone may be allowed to provide unrestricted banking services similar to the offshore yuan trading offered by HSBC, Standard Chartered and other banks in Hong Kong, which are already popular with corporate and individual clients.

Dim sum bonds, loans and foreign exchange trading are expected to be included.

Policymakers may allow free conversion of the yuan under the capital account and market-oriented interest rates on a trial basis in the pilot free trade zone, according to a draft plan acquired by Bloomberg News.

It also said that qualified foreign banks may get the go-ahead to set up branches or joint ventures with local lenders in the zone, with some Chinese banks possibly offering offshore banking services,

"If this speculation is true, it will be a great stage in the nation's economic reform, and that will upgrade China's economy from low-end manufacturing to higher-end services," said Shen Zhengyang, an analyst with Northeast Securities Co Ltd.

FTZ concept stocks had another strong day on mainland markets, with 23 rising by the daily limit.