Baby Steps In Qianhai To Internationalise The Yuan

China is making progress towards a test relaxation of capital controls in Qianhai Bay, the still largely unbuilt special business zone near Shenzhen and Hong Kong, the head of the National Development and Reform Commission Zhang Ping says. Zhang told reporters at the National People’s Congress that only half a dozen of some 22 issues remained outstanding so a currency pilot program could go ahead.

Zhang was confident these would be sorted out by mid-year. Reconciling the legal jurisdictions of China and Hong Kong when it comes to contracts would seem to be the most contentious one.

Under the pilot scheme, companies based in Qianhai will be free to borrow in yuan from Hong Kong banks at market rates. The companies will be exempt from requesting permission to import the yuan across the border; and the banks will not be required to lend to them at the official borrowing rates set by the central bank. Initially sums involved will be small. Total lending is to be capped at 2 billion yuan ($320 million).

It will be the first of what is intended to be several experiments in the freer convertibility of the yuan and interest rate reform. In time they may be seen to have been an important step in the internationalization of the currency. The hope is sufficiently strong for 15 international banks to be setting up branches in Qianhai. That in itself is another tiny step towards Hong Kong establishing itself as the yuan’s offshore trading centre.

New president Xi Jingping visited Qianhai late last year on his southern tour in his capacity as the Party’s new general secretary, suggesting the project has high-level backing. The trip was also a nod to his father, Xi Zhongxun, an advocate of special economic zones as Deng Xiaoping was first opening up China’s economy in the late-1970s. Shenzhen, the first, was famously described as a “commune of capitalism.”

Much as Shenzhen was a laboratory for China’s economic reforms of the past 30 years, so some pin similar aspirations on Qianhai for administrative and legal reforms along the lines of Hong Kong. In practice the pilot schemes are being more narrowly focused on finance, taxation, human resources, education, health and telecoms as incubators of service industries. But Qianhai can be regarded as another barometer of how far the new leadership feels it can push economic reform.

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