The plans for the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai) werefirst announced in June following the visit to Hong Kong by Chinese president Hu Jintao. The aim to bring faster economic cooperation between Hong Kong and the Mainland and also experiment with greater cross-border use of the renminbi.
Yet because China places restrictions on remitting renminbi (RMB) into China, it has not been clear how Qianhai would operate within the existing regulations.
Following a visit to the Qianhai Authority, Raymond Yeung, senior economist at ANZ research says capital flows with Hong Kong will be relatively unrestricted though subject to quotas in the early stages.
For example, flows of renminbi between Hong Kong and Qianhai can be reciprocal meaning the zone can target renminbi lending by Hong Kong’s banks as well as outflows of funds.
“RMB funds from Hong Kong should be used to finance local construction and investments in Qianhai, approved on a case-by-case basis. The RMB recipient party should be a registered entity (or even an incorporated entity) in Qianhai. The detailed rules governing fund flows are likely to be subject to quota control,” he said in a report published November 19.
However funds will be prevented from travelling into the Mainland in the continuation of China’s strict capital control policy.
“Qianhai will operate as a closed system in the early phase of development, preventing direct flow of funds with the rest of the Mainland,” he said. “As the development zone is a national level initiative governed by a cross-ministerial committee, comprised of members from 27 ministries, it is expected that the PBoC [People’s Bank of China] and State Administration of Foreign Exchange (Safe) will lay out rules to limit the leakage of China’s highly-controlled capital accounts.”
China’s capital controls allow renminbi to flow out of China but make it very difficult to bring the currency back to the Mainland. Any company that wants to remit renminbi back to China must first receive for permission from Safe before doing so. Meanwhile, foreign international investors who wish to buy Chinese stocks or bonds must apply for a quota.
As well as allowing freer flow of renminbi, Qianhai also represents the liberalisation of transport and communications that should give it advantages over other cities in China include Shanghai. Under the current plan the zone may be linked to Hong Kong through an underwater tunnel. The Qianhai Authority has also said that there will be no information filtering of communications and telephone calls to Hong Kong will be treated as local. In addition, foreign investors will be encouraged to set up funds and all commercial contracts will follow common law.
Despite the many advantages, Yeung says Qianhai is not an immediate threat to Hong Kong’s status as the primary centre for offshore activities.
“By operating with fewer regulations, Qianhai could undoubtedly attract many Mainland and international investors. According to the authorities, 196 projects will be registering in Qianhai by the end of 2012, of which more than 140 are finance related,” he said. “Given the fact that the overall financial sector reform and capital account liberalisation are proceeding on a gradual basis as directed by the prudent stance of the PBoC, we do not think Qianhai will be a direct substitute for Hong Kong.”