In keeping with China's propensity to use specially designated economic zones as a testing ground for the liberalization of its economy, there are plans to modernize the Qianhai, Shenzhen region by boosting its trade with Hong Kong, among other measures, in announcement made at the end of last month.
The project, known as the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, will cost around $45 billion to develop, and is due for completion by 2020. It will focus on developing financial, logistics and computer services on the mainland. Analysts reckon it represents a major step in the development of free convertibility of the renminbi in China.
Among the economic policies set, the zone will be allowed support the granting of RMB loans for offshore projects by banking institutions established in Qianhai. In addition, it has been empowered to support select enterprises and financial institutions registered in Qianhai that wish to issue renminbi-denominated bonds in Hong Kong; and it will also allow new methods of foreign exchange settlement of capital funds, investment and fund management. The Qianhai pilot scheme is reminiscent of the establishment of Special Economic Zones (SEZ) during Deng Xiaoping’s Southern Tour in the 1980s, which introduced free market practices. As with the development of Shenzhen in the 1980, Michael Vrontamitis, head of product management, east, and transaction banking for Standard Chartered in Hong Kong, says that lessons learnt from Qianhai have the potential to be rolled out nationally: “Developments in Qianhai came from the centre. This implies it is a China initiative, not just a Shenzhen initiative. The way to think about it is as a ‘toe in the water’ [for Beijing],” he says.
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“The recent development between Hong Kong and Qianhai is a regional issue, and is not the beginning of a broader Chinese economic policy,” says Alex Eymieu, partner of CTPartners in Hong Kong. “China is creating tools for people to integrate businesses across its own borders. This is similar to what is happening between Fuzhou and Taiwan with special economic zone and transportation channels. Focused economic policies like these are used to enhance local and regional economic growth within Greater China." Vrontamitis says: “Part of [the project] is about developing the region, but you cannot ignore the fact that it is a test for what can be possible throughout the rest of China.” Chi Lo, CEO of HFT Investment Management in Hong Kong, agrees: “It is a usual practice of China to start small experiment for any new reform initiative and if the experiment proves to be successful, the scheme will be rolled out on a national scale.”
Nevertheless, there are very few in-depth details of how Qianhai will be allowed to run, explains Justin Chan, deputy head of global markets, Asia pacific and head of Hong Kong trading at HSBC: “Economic policy for Qianhai is no more than a framework. The government is yet to stipulate what type of offshore activities that companies will be able to operate in Qianhai, if companies will be allowed to borrow offshore, or if they will be allowed to use the money the raise outside of Qianhai. There are still a lot of issues to be ironed out.”
He adds: “Qianhai is at its nascent stage of development. For it to become a financial centre and central to the internationalisation of the RMB, infrastructure is essential. But I do think that international banks are willing to set up shop in Qianhai because of the economic potential there.”
Some 37 companies have already signed contracts worth RMB220 billion ($34.54 billion) with officials from Qianhai. Out of the 37 companies, 12 of them were from Hong Kong, 12 were foreign-owned, and were 13 domestic corporates.
The project reflects traditional Beijing policy making of trial and error with respect to economic liberalization. “The Qianhai experiment is low risk. If it doesn’t work, they can slow it down. China has no rush to reach the end goal. What’s more important is that they do it right,” says Vrontamitis.
China is often criticized for its slow-paced liberalization process. But China’s economy is developing a lot more quickly than it is often given credit for, says Vrontamitis at HFT Investment Management: “China is the same size and is just as diverse as Europe. But more importantly, European leaders are yet to find a solution to the euro zone crisis." He adds: “That is a pertinent example of something moving slowly. But in China, swamps have become cities in less than 15 years. In my opinion, China is actually moving more quickly than people realise. Acting slowly should not be mistaken for acting cautiously, which is what China is doing.”