New Pearls for the Delta?

Guangdong’s new special zones start to take shape

Cast member Jennifer Lawrence poses at a red carpet event for the China premiere of "The Hunger Games: Mockingjay - Part 2" in Beijing

Hunger Games is Hengqin-bound

Of the four special economic zones created by Deng Xiaoping’s government in 1979, three were in Guangdong province. They were chosen in places on China’s fringes, in part so the experimentation could be kept well away from the rest of the country. But international contact was crucial too. Two of the zones, Shenzhen and Zhuhai, were selected for their proximity to the foreign-controlled enclaves of Hong Kong and Macau. The third, Shantou, had a history as a foreign treaty port under the Qing emperors. The hope was that this experience of international contact would help Shantou in sourcing investment from its links to overseas Chinese too.

Shenzhen was by far the most successful of the three zones, of course, although they all benefited from preferential policies including duty-free imports on materials used for making exports, lower tax and fewer restrictions on repatriating profits.

Reprising its role as a petri dish for policy experimentation, the province cut the ribbons this April on another round of special zones in Nansha, Qianhai and Hengqin. Launched officially as part of the China (Guangdong) Pilot Free Trade Zone, each area has been chosen to play a role in fostering the next phase of economic growth. Like before, each is prioritising deeper financial and economic integration with the wider world, despite the return of Hong Kong and Macau to full Chinese sovereignty since the inaugural zones were launched. But in a clear step forward from the earlier ambitions for investment in foreign-owned factory lines, the authorities now want to promote a wider transformation of China’s industrial base from low-end production towards higher-value manufacturing and services – fuelled in part by a reorientation towards greater consumerism.

All three zones wear their badges as pioneers with pride, talking determinedly about the tasks ahead in encouraging innovation. They are all offering tax savings for companies and qualified individuals that set up shop there. But there is a basic split of priorities among the trio, shaped primarily by their geographical locations.

Qianhai, with its greater emphasis on upgrading the country’s financial services sector in its blueprint, looks likely to be the heaviest-hitter of the three, because of its position between Hong Kong and Shenzhen, the two most advanced cities in the region.

It also has aspirations as a technology hub, drawing on a combination of Hong Kong’s financial expertise and the spillover benefits of Shenzhen’s emergence as a hub for innovation in areas like robotics and wearable tech.

Qianhai is also set to play the key role in testing out further reforms in cross-border capital flows, which should deepen Hong Kong’s position as an offshore centre for the Chinese currency.

Across the Pearl River to the west is Hengqin, an island separated by the narrowest of waterways from the Cotai Strip, the centre of gaming activity in Macau.

Like Hong Kong, land-starved Macau is a special administrative region, although it is now better known as the world’s largest gambling hub. After years of boom its economy is one of the world’s worst performing in 2015 – following a policy-driven clampdown on high-stakes gambling. Indeed, Beijing has ordered a diversification away from the junkets and baccarat tables to a more rounded offering of attractions.

Hengqin – where no gambling is allowed – is part of the strategy, offering new space for a wider range of tourism and entertainment facilities. It is already home to the world’s largest marine theme park, which attracted 8 million visitors in 2014, although news reports this year have speculated that Beijing is frustrated with some of the pace of development there, especially that investors have been sitting on land purchases rather than developing them.

Last month Hong Kong-based property firm Lai Sun announced a delay in the opening of Creative Culture City, a cultural-cum-commercial project in Hengqin, which now won’t debut until 2018, for instance. But a few days later it also gave notice of “at least 10 to 15 attractions” that it will be developing on movie industry themes licenced from Lionsgate, the Hollywood film studio, including an amusement park based on The Hunger Games franchise.

Lai Sun will also be building a “Family Edutainment Centre” on Hengqin, with content provided by the National Geographic Society.

Sitting also on the western side of the Pearl River and a little further north from Macau, Nansha is the largest of the three special zones. Nansha says its main advantage is its position at the heart of the Pearl River Delta, 70km from Hong Kong, 75km from Macau and only 20km from Guangdong’s provincial capital, Guangzhou.

Currently it seems focused on capitalising on its port facilities by announcing itself as a new hub for maritime logistics, shipbuilding, ship insurance and sea freight insurance. But local planners are also wooing hi-tech electronics firms, medical device companies and carmakers.

They have also been investing in road and rail links. “We are building a ‘one-hour life cycle’ encompassing Nansha, Hong Kong and Macau,” Guangzhou’s mayor Chen Jianhua explained to China Daily this summer. “Our goal is to make sure that it takes no more than one hour for people to commute to work within the region. They can leave their home in the morning and be back in the evening.”

Similar to Shanghai’s much-vaunted free trade zone, thousands of enterprises have registered for Guangdong’s new zones, but fewer have started operations there. International investors have also tended to take a wait-and-see approach, holding off on major initiatives until the business procedures and legal frameworks become clearer.

That has also been the case in Qianhai, which wants to attract investment from across the border in Hong Kong. So far about 2,300 firms from Hong Kong have set up shop there, or 4% of the total registrations, according to figures in the China Daily this month.

Carrie Lam, a senior civil servant in the Hong Kong government, renewed calls for Hongkongers to start more of their businesses in Qianhai last week, saying that entrepreneurs in the zone could get financial support from a Hk$300 million ($47 million) fund established by the government.

But the most significant announcement from Qianhai this month is that Shenzhen Qianhai Financial Holdings — the strategic investment platform for the state entity governing the zone – is setting up a securities company with HSBC there.

HSBC joins a number of other international banks with shareholdings in securities brokerages in China. So far the going has been tough and few have made any profit. None of the foreign firms has taken advantage of rule changes that allow them to up their equity stakes from a third to just under half, the Financial Times has reported.

But what marks the HSBC deal out as different is that it is the first time that the overseas partner has been able to apply for a majority stake in the joint venture. The new entity is being established under the terms of Hong Kong’s Closer Economic Partnership Agreement with China, in which Hong Kong-funded financial institutions can take a maximum 51% of the shareholding, in contrast to the 49% cap imposed on foreign banks operating in China.

Although the new brokerage must still apply for an operating licence, its backers hope that HSBC’s controlling stake, and its location in an area primed for cross-border financial reform, will allow it to channel investment into renminbi-denominated stocks and bonds in China.

“It opens up quite a significant opportunity, mostly in the area of bonds,” HSBC’s chief executive Stuart Gulliver told reporters after the announcement of the deal. “It allows us to do debt capital markets in China in renminbi for corporates.”

The creation of the new securities house in Qianhai also dovetails neatly with HSBC’s bigger push into the Pearl River Delta, as well as its efforts to capitalise from the further opening up of China’s capital markets.

“We wanted to basically do our securities joint venture with Qianhai because actually we’re very, very bullish on the opportunities that exist,” Gulliver explained. “The bond market is going to grow substantially in China. In order for us to be able to participate in it we need a securities licence, and that’s what this gives us.”

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