Shanghai free zone smells like it's just another property deal

While all the talk is of financial reforms in the new economic areas, land sales suggest it's just another attempt by local officials to boost revenues

PUBLISHED : Monday, 16 September, 2013, 12:00am
UPDATED : Monday, 16 September, 2013, 4:22am

The American critic HL Mencken famously said that "a cynic is a man who, when he smells flowers, looks around for a coffin".

By Mencken's definition, then, Monitor is a cynic. Whenever anyone waxes lyrical about the stunning potential of the mainland's latest special economic district or free-trade zone, this column always looks around for a property deal.

That's why it is difficult either to get excited about Shenzhen's Qianhai area and Shanghai's new special zone, or to get worried about the threats they pose to Hong Kong's livelihood.

In each case we've heard any number of breathless tributes about how the new business district is a giant step towards financial liberalisation. Equally, we've been bombarded with endless dire warnings about how the new areas are going to eat Hong Kong's lunch, driving the city into penury.

But to Monitor, each initiative smells suspiciously like an attempt by local officials to pump up their revenues from municipal land sales.

Clearly the mainland authorities are interested in conducting controlled experiments in making the yuan more easily convertible and in gradually opening China to freer flows of investment capital. But there is no reason why they need to mark out undeveloped geographic areas in order to conduct those experiments.

In the case of capital account opening, it would be far easier just to license a limited number of existing bank branches to participate in cross-border yuan loans than to try and establish two whole new financial centres.

However, in both Shenzhen and Shanghai it looks as if market opening and financial liberalisation are secondary objectives compared with bumping up income from property deals.

Indeed, in July and August the Shenzhen government went ahead and raised 23 billion yuan (HK$28.9 billion) by selling development plots in Qianhai, even though it remains unclear how many of the special district's much-vaunted liberalisation measures will actually work in practice.

Similarly, Premier Li Keqiang is scheduled to open Shanghai's free-trade zone later this month, apparently untroubled by the awkward fact that policymakers have yet to decide exactly what will make the district so special.

There have been vague promises about liberalising bank deposit rates, and of slashing tax rates for resident companies.

But so far the small print remains unwritten. And following warnings that Beijing is anxious to make sure the new special zones do not simply create an enormous arbitrage opportunity, interested companies would be well-advised not to expect wholesale financial deregulation in either Qianhai or Shanghai. The flip side of this is that Hong Kong has little to fear from either of the new special areas.

In the case of the promised opening of Shanghai's free-trade zone to inward investment in service industries like insurance and logistics, it is unclear what advantages, if any, resident corporations will have that Hong Kong companies do not already enjoy under the 10-year-old Closer Economic Partnership Arrangement.

As for banking and other financial services, Hong Kong owes much of its business to its position as an entirely separate jurisdiction from the mainland, and the benefits that confers in round-tripping mainland money back onshore as foreign capital. As these new zones are likely to reinforce rather than erode the advantages of "foreign" - as opposed to domestic - capital, Hong Kong's position is more likely to be strengthened than damaged by their establishment.

So Monitor remains dubious about the various claims made for Qianhai and Shanghai.

By Mencken's standards, that makes this a highly civilised column. As the old humbug wrote: "Men become civilised, not in proportion to their willingness to believe, but in proportion to their readiness to doubt."