Rise of the RMB

Betting on Qianhai

Outlook for new zone prompts property punts

In November 1986, Shenzhen hosted China’s first female bodybuilding contest – a radical undertaking when you consider that no one had donned a bikini in public since before Mao came to power in 1949.

Shenzhen went on to pioneer much more important events as the test venue for many of Deng Xiaoping’s free market reforms. China’s current leader Xi Jinping is well aware of the city’s significance too. His late father Xi Zhongxun was one of the key advocates of “special economic zones” like Shenzhen. Xi senior visited the city for his first inspection trip in 1978 and would later live there for most of the final years of his life.

When Xi junior made his own first official trip outside Beijing last month, he also chose Shenzhen. To be precise, he chose to go to Qianhai, a 15 square-kilometre special zone earmarked for bolder reforms, which has been hived off from the main city.

Special zones are no longer quite so special these days, with more than a dozen experimental areas in China. But does Qianhai now deserve to be considered more special than most?

The answer is a cautious yes. Qianhai is located a stone’s throw from two of China’s most important areas of financial and economic activity: Shenzhen itself, and the special administrative region of Hong Kong. But more significantly, the central government has indicated that it wants Qianhai to be a new testing ground for its currency – the renminbi – to go global (see WiC157).

How is that going to work? The honest answer is that nobody is quite sure. But the speculation is that businesses inside the Qianhai zone will enjoy special privileges in cross-border capital flow. If things go well, the arrangements might then be extended to other parts of China – just as Shenzhen’s pioneering of export processing activity eventually spread to the rest of China.

In a landmark deal last week, 15 banks in Hong Kong (including HSBC) signed an agreement to offer a combined Rmb2 billion ($320 million) in cross-border loans to companies in Qianhai. “What is big is the government is taking a hands-off approach for the first time and allowing lenders and borrowers to make their own deals,” chief economist Wang Jianhui with Southwest Securities told the China Daily.

Says China Business Journal: “Qianhai will offer the biggest and most direct channel for freer forex flow in and out of China, especially for bringing renminbi back into the mainland, offering lower financing costs for Chinese firms and higher investment returns for holders of offshore renminbi.”

The Shenzhen government is showing no shortage of ambition, saying that it wants Qianhai to become the “Manhattan of the Pearl River Delta” and promising tax incentives to lure international firms and financial professionals. The ultimate goal, according to Wang Jinxia, liaison director of the Qianhai Administration Bureau, is that “working in Qianhai will gradually replace many people’s American dream, especially those who want to make a career in financial services.”

As of mid-January, seven domestic fund houses and four private equity firms had obtained approvals to set up offices in Qianhai, with another ten in the queue.

But Qianhai’s development is still at an early stage. Forex regulations and investment rules are yet to be ironed out.

In the meantime – like many Chinese cities with ambitious planning blueprints – real estate has become the most obvious proxy to invest in Qianhai, including the stocks of Hong Kong-listed firms with land reserves in the special zone.

For example, shares in Shenzhen International, a thinly-traded logistics and property firm with 380,000 square metres of industrial sites in Qianhai, surged more than 40% in a single trading session last week. One piece of broker research is valuing the firm’s Qianhai real estate at HK$74 billion ($9.5 billion), way in excess of its HK$15 billion market value. Even smaller firms with tiny portfolios on the fringes of the zone are being hyped as “Qianhai plays” by speculators.

Investors might be advised to show caution, until the plans become more concrete. Others, like the Shenzhen Special Zone Daily, are much more bullish about Qianhai’s prospects, claiming that “it has the central government’s blessing to try anything when it comes to financial innovation and reforms.”

Only time will tell.


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