Financial institutions are keen to be part of the Qianhai experiment, but the lack of clarity to how lending activities should be conducted and what type of corporates will be able to participate in this pilot scheme is deterring the economic zone’s development.
It has taken China a while to establish proper guidelines to how banks and corporates will be able to do conduct business in Qianhai Bay – the new economic zone on a peninsula across the water from Hong Kong that will be the first place to allow cross-border lending in renminbi. And although it is common for Chinese policymakers to take baby steps, financial institutions are getting anxious about what sort of policies will be launched in the coming months.
“There’s nothing concrete that I can tell you at the moment. The only thing I have heard is a rumour that there may be some further guidance to the format of the loan, format of doing business in the Qianhai area being announced maybe mid-May,” said a Hong Kong-based head of renminbi business to Asiamoney PLUS on April 29.
Since Beijing unveiled the details on June 29 that Hong Kong banks will be able to lend renminbi directly to companies in Qianhai, 15 Chinese firms in the economic zone have signed agreements with eight Hong Kong branches of Chinese banks and seven foreign banks for cross-border renminbi loans totalling Rmb2.6 billion (US$420 million). However, this was announced back in January.
As a result, financial institutions have been kept in the dark for a few months as to what needs to be done next – whether setting up a branch or subsidiary in Qianhai is necessary and what sort of corporates will be able to set up shop in the economic zone.
“Until they have proper financial infrastructures in place, banks in Hong Kong don’t know who to lend to because first of all there are no customers,” added the head of renminbi business development.
The slow-launch of Qianhai could be an indication that China is having trouble finding the balance between establishing a free economic zone and keeping reins on its capital account, say experts.
“It has the potential but the growth will very much depend on whether the authorities really want to let the business grow and not interfere too much,” said a Hong Kong-based China economist.
There are risks involved if Chinese policymakers were to launch Qianhai too quickly. For example, corporates that are able to raise cheaper financing in Qianhai could use the funds outside of China, defeating the purpose of establishing and developing the economic zone.
“What they are most worried about is loans extended to companies in Qianhai that are not for use there but for use elsewhere. The biggest worry is probably that companies borrow funds from Hong Kong banks to get around the capital account restrictions,” said Sonny Hsu, senior analyst at Moody’s to Asiamoney PLUS. “Money is fungible, so once the borrowers obtain the funds, they may use it for other purposes rather than for use in Qianhai.”
However, the Qianhai Development Authority will screen companies that apply to setup operations in the zone, says Moody’s. Only those registered and operating in Qianhai can then borrow offshore renminbi from Hong Kong banks.
“They would have to keep a close eye on how these funds will be used. In theory, loans from Hong Kong banks to customers in Qianhai do not need regulatory approvals,” said Hsu. "Nevertheless, Hong Kong banks have to lend to Qianhai customers through an agency bank in Qianhai. The regulator does have supervisory authority over the agency banks, and can monitor transactions and aggregate lending levels."
The establishment of Qianhai is supposed to go hand-in-hand with China’s other capital account liberalisation activities. However, market participants believe that other types of reforms would be more suited to China’s goal of relaxing its capital account.
“Individual state level capital reforms seem to be a bit odd because even if it happens, it will happen on a very small scale and would not have a macro impact. They probably will put a cap on how much things can happen there,” said Zhiwei Zhang, chief China economist for Asia ex-Japan at Nomura. “It should happen on an aggregate level, like the widening of the renminbi band which could happen in the middle of the year. That kind of reform makes more sense to me.”
“There are also questions to why Qianhai instead of Shanghai and why do you want to have so many financial centres,” he said. “There are many other cities in China that also wants to become a financial centre in China.”
Qianhai was first established in 2010 and is due for completion in 2020.