Hong Kong banks’ loans in neighboring Shenzhen’s Qianhai district may jump in the next three to five years as companies registered in the zone start operating, according to Wing Lung Bank Ltd.
The bank is among the first 15 Hong Kong lenders to Qianhai companies, which agreed to borrow a total of about 2 billion yuan ($321 million), the city of Shenzhen said this week. Banks will probably price the loans, mainly for construction and development, at 4 percent to 4.5 percent, Henry Huang, assistant general manager of the Hong Kong-based unit of China Merchants Bank Co., said in a briefing yesterday.
Qianhai, a 15-square-kilometer (5.8-square-mile) zone, was chosen as a testing ground for freer yuan usage and capital account convertibility. The program offers Hong Kong banks another avenue to use their yuan deposits, which have grown 25-fold in the past six years.
“Qianhai is still a site waiting to be developed,” Huang said. “As companies move in, we will gradually see lending demand for day-to-day operations. The process may take three to five years.”
HSBC Holdings Plc, Standard Chartered Plc and China’s five biggest banks are also among the firms selected to lend to companies in Qianhai. Units of Tencent Holdings Ltd., ZTE Corp. and Konka Group Co. signed pacts with Bank of China (Hong Kong) Ltd. on Jan. 28 for the cross-border yuan loans, according to the city’s statement that day.
Hong Kong banks have been burned in Guangdong province before, when the 1998 failure of the mainland region’s investment arm during the Asian financial crisis led to the first Chinese international bond default since the birth of the People’s Republic in 1949.
Qianhai cross-border yuan loans probably won’t show “explosive growth” while the area is still building up its infrastructure, Huang said. Interest rates on loans may increase in line with the risk of later projects, he said.
“China seeks to make its capital account basically convertible in 2015,” Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd., said by telephone today. “If Qianhai is proven to be a successful pilot zone for testing capital-account convertibility and interest-rate setting, we may see China setting up more of these zones.”
Wing Lung Bank, which will celebrate its 80th anniversary next month, may seek to move its Shenzhen branch or sub-branch into Qianhai to receive tax benefits, according to Huang.
The government will offer 15 percent corporate income tax to certain Hong Kong firms in Qianhai in an attempt to encourage the city’s services sector to operate in the zone, the National Development and Reform Commission said last year.
Wing Lung Bank generated HK$277.8 million ($36 million) of pretax profit from mainland China in the first half of last year, or 22 percent of the total for the period, it said in its 2012 interim report. That compared with HK$73.3 million, or 6.3 percent of the total, a year earlier. Cross-border yuan businesses contributed to an almost four-fold increase in pretax profit from China, Huang said.
Net interest margins at Hong Kong banks may narrow “slightly” this year, as an indirect effect of the interest-rate liberalization that has squeezed loan profitability on the mainland, Huang said.