Tag Archives: special economic zones

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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China’s Special Economic Zones Face Challenges, Need Transition

China’s special economic zones are facing a critical period of transition. As consequential as they have been to the country’s rapid growth over the three decades since Deng Xiaoping launched economic reform in 1978, they now face a number of challenges. These include:

  • moving up the global value chain;
  • questions over the sustainability of export-led growth;
  • environmental and resource constraints;
  • institutional changes;
  • lagging social development.

These are largely the challenges facing the broader economy, too. History suggests that it is the special economic zones that will first try to address these issues. As World Bank staff economist Douglas Zhihua Zeng writes in a new working research paper,

The SEZs have made crucial contributions to China’s success. Most of all, they— especially the first ones—successfully tested the market economy and new institutions and established role models for the rest of the country to follow.

Zeng’s paper is well worth reading. As well as Shenzhen (the first SEZ, started in 1980) and its six fellow SEZs, it looks at economic and technological development zones, free trade zones, export-processing zones, high-tech industrial development zones and, though Zeng, rightly, considers them a different economic animal, industrial clusters.  Zeng estimates that by 2007, the latest year for which he can get numbers, the total GDP of the major state-level zones accounted for 22% percent of national GDP, 46% of foreign direct investment and 10% of employment, mostly skilled jobs as they have been hotbeds of China’s new and high-technology firms, accounting for more than a third of the country’s R&D spending.

As the paper notes, the zones vary widely in their performance and speed of growth, but mostly they have all more or less succeeded. That is not always the case with economic development zones in developing economies. Zeng identifies several characteristics of China’s success with SEZs:

  • strong commitment from the top leadership, and high-level pragmatism, flexibility, and autonomy;
  • a gradualist approach toward reform;
  • proper role of government (active, pull-up strategy);
  • foreign direct investment, including from the Overseas Chinese diaspora;
  • public-private partnership approach
  • technology innovation, adaptation, and learning;
  • clear goals and vigorous benchmarking, monitoring, and competition.

Zeng also notes one other characteristic of the most successful SEZs, “the capacity…to identify its comparative advantages and bottlenecks accurately and implement the right strategy to remove problems as well as to build a conducive business environment.” What that means for the SEZs’ future, Zeng says, is that they will have to:

  • put more emphasis on producing for domestic markets and consumption;
  • move towards a more knowledge- and technology-based development model;
  • promote technology innovation and learning;
  • adopt stricter environmental and social standards.

The zones will attempt to do that by, in Deng Xiaoping’s phrase, “crossing the river by touching the stones”. There will be splashes along the way, but getting that right will have impact far beyond the zones themselves.

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