China to Test Capital Account Conversion in Qianhai Zone

China will make Qianhai, part of the Shenzhen economic zone, a test ground for freer yuan usage and capital account convertibility, the National Development and Reform Commission said today.

Companies in Qianhai will be encouraged to sell yuan-denominated bonds in Hong Kong and to experiment with cross-border loans in the Chinese currency, Zhang Xiaoqiang, the vice chairman of the national planner, said at a press conference in the city today.

Qianhai is a 15-square kilometer special zone on the west side of Shenzhen, Guangdong province, that officials are seeking to develop into a financial service hub. The world’s second-biggest economy widened the yuan trading band for the first time since 2007 in April, a move that may mark an early stage of a capital account opening.

“It lacks many details and seems to be a small-scale move, but highlights the determination of Chinese policy makers to open the capital account,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a note today. “We expect convertibility within five to 10 years, but the new zone means it may happen sooner rather than later.”

Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino said last September.

Yuan Products

The moves “will facilitate further liberalization of the renminbi, which will benefit both Hong Kong and the mainland,” said Timothy Tse, chief executive officer of Value Partners Group Ltd. “For the asset management industry in particular, this opens up the possibilities of offering more renminbi investment products.”

There are 21 companies registered and 170 projects ready to start in the special zone, Xu Qin, mayor of Shenzhen, said today. The government aims for 150 billion yuan ($23.6 billion) worth of gross domestic product by 2020 in Qianhai, NDRC said.

The area, expected to host financial and services companies, was created by China’s State Council in 2010 and has laws that model Hong Kong-style administrative structures.

“Qianhai should pioneer capital account convertibility,” Zhang said, without giving details. The government also wants to encourage companies to set up headquarters, and investment funds to establish operations in Qianhai, he said.

Investment Rules

The government will ease entry rules for Hong Kong companies, and offer 15 percent corporate income tax to some firms, encouraging the city’s services sector to operate in Qianhai, Zhang said.

“Companies could kick start their operations in Qianhai with funding from Dim Sum bond sales,” said Kelvin Lau, an economist at Standard Chartered Plc. in Hong Kong. The measures will also help give Hong Kong companies “the first-mover advantage.”

Hong Kong was designated as China’s major offshore yuan trading hub in the nation’s latest five-year plan. The city has 552 billion yuan of deposits in the currency in April, the largest outside China.

Closer Ties

The city today also signed a supplementary agreement for closer ties. China will study lowering the requirement for Hong Kong financial institutions to apply for qualified foreign institutional investor status.

The Chinese government will support mainland companies’ listing in Hong Kong, and help smaller ones raise capital through selling shares overseas, it said. China will also look at ways to increase co-operation on commodity futures and promote the establishment of a futures market system, it said.

China also wants to attract talented people from Hong Kong and overseas to work in Qianhai, Zhang said, adding there will be concessions on personal income tax for workers in the zone.

Service providers from Hong Kong will be allowed to build international schools and hospitals without the need to seek a partner, NDRC said. Telecommunications operators in Hong Kong and Macau are encouraged to start joint ventures in Qianhai, Zhang said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE