12 Mar

Manhattan of the Pearl River Delta

China’s most recent development comes in the form of another “special Zone” , the “Qianhai experimental zone” will be China’s experimental move towards a more international yuan as well as more open financial sector with the introduction of Hong Kong’s international financial products. The zone is still in its conceptual stages having only recently been approved by the National Development and Reform Commission. At the heart of the development is the cross border Yuan lending from Hong Kong Banks with the sole purpose of investment into Qianhai infrastructure. The Hong Kong Banks have permission to loan up to 2 billion in Yuan a small amount to start with but with the scope for expansion. The cross border lending in Yuan is a move in line with China’s ambition to create an internationalized currency to compete with the dollar. The loans will have to be approved by the PBOC and abide by a number of other rules applied to the special zone. The loan rates will be determined between the lender and borrower, a move away from the state managed interest rate system currently in place. Hong Kong Banks are eager to put their surplus liquidity to use. As well as the loans Hong Kong firms will develop schools and hospitals as part of the agreement to invest in Qinghai’s infrastructure. China has offered a 15% corporation tax rate to entice development into the region. The hope is for developers and regional governing powers to be autonomous and “bold” in their approach to the development President Xi hopes to replicate the successes of the former SEZs to develop new models of growth for China.

The development has come under some criticism however, the scale of the development is relatively small and its effectiveness has come under question. There is also no established anti-corruption body to address the possible problems Hong Kong faced before the ICAC was established. Another point of criticism is whether this is a somewhat reckless plan in light of the recent housing bubble. With some property in Qianhai exceeding prices of places such as Manhattan and Paris, in a largely uninhabited under developed city is this speculation premature? The opportunity it would appear is ripe with eager Hong Kong firms to extend their financial expertise to the mainland and benefit from the first mover advantage. Some of the success of the development however may rest in the hands of the already successful Shenzhen officials. The question is whether they will willingly put themselves at risks considering they are already in a very comfortable position.

China is developing its economy in a distinctively unique way. It has the economic resources to embark on such “experiments”. The experimental formula that china has adopted with success has the advantage of drawing upon world history .China has some key issues to resolve that may stunt the development of such experiments mainly corruption. If it hopes to continue its international growth this is a key area for correction.


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