Hong Kong bankers say reforms will help establish Qianhai as yuan centre

In the first of a two-part series on the new Qianhai experimental zone, Hong Kong bankers describe their role in cross-border lending reform

PUBLISHED : Tuesday, 26 February, 2013, 12:00am
UPDATED : Tuesday, 26 February, 2013, 5:21am

Moves to create the "Manhattan of the Pearl River Delta" on a patch of reclaimed land west of Shenzhen kicked off with a bang last month, and bankers are bullish over prospects for the future financial hub.

The Qianhai experimental zone, which was given a top-level seal of approval in the form of president-to-be Xi Jinping's southern tour soon after he became Communist Party general secretary last year, has been mooted since 2010 as a testing ground for economic liberalisation.

While some in the financial industry believe the 15-square-kilometre development will prove to be no more than a minor project, others believe it will provide Hong Kong financial firms with a window of access to the country as a whole.

HSBC Hong Kong chief executive Anita Fung Yuen-mei hailed the Qianhai project as a milestone for the opportunities it presents.

"It will allow banks in Hong Kong to offer cross-border yuan loans to Qianhai companies," Fung said. "This is a breakthrough development that will benefit not just the banks, but it also marks an important step forward in the internationalisation of the yuan,"

In December, the People's Bank of China's Shenzhen branch announced provisional regulations allowing firms registered in Qianhai to take out yuan-denominated loans from Hong Kong banks.

It will allow banks in Hong Kong to offer cross-border yuan loans to Qianhai companies. This is a breakthrough that will benefit not just the banks, but it also marks an important step forward in the internationalisation of the yuan

Last month, HSBC, the largest bank in Europe and Hong Kong, was among 15 Hong Kong banks given permission to offer a combined 2 billion yuan (HK$2.46 billion) in loans to companies that base themselves in Qianhai.

Banks like HSBC are taking Qianhai seriously, not just because it is an hour's drive from Hong Kong. More importantly, the National Development and Reform Commission has confirmed it will act as a testing ground for freer convertibility of the yuan.

HSBC is one of 37 financial firms that signed non-binding agreements in July to pour investments worth more than 300 billion yuan into Qianhai.

Under mainland capital controls, all fund transfers in and out of the country need official approval. But since 2009, Beijing has gradually amended rules to allow the yuan to be used for international trade settlement and investment purposes.

The liberalisation of the yuan goes some way to explain why the 15 banks, including HSBC and fellow big players Hang Seng, Standard Chartered and Bank of East Asia, were quick to sign up to the 2 billion yuan in loans, which will cover 26 projects in Qianhai. The banks were equally quick to hail their roles in the deal for marketing purposes.

But some analysts question the real benefits of the loans, as the sums involved are relatively small. In addition, the cross-border loans can only be used by companies basing themselves in Qianhai and used only in Qianhai projects, helping to build a city with only 800,000 residents.

In addition, while banks in Hong Kong can freely negotiate the structure, terms and interest rates of loans, the overall level of lending will be subject to approval by PBOC's Shenzhen branch.

But HSBC's Fung thinks differently. "The 2 billion yuan loan amount looks small, but the business will grow bigger in the long term," she said.

She added that the cross-border lending experiment would mean that banks could directly use yuan deposits raised in Hong Kong to lend to Qianhai-based companies.

At present, mainland or foreign companies that borrow in yuan from banks in Hong Kong must seek official approval to transfer the funds across the border, in line with other foreign direct investment.

Another big step forward, Fung said, is that Hong Kong banks will be able to negotiate lending rates with borrowers. This is seen as an experiment in liberalising interest rate regulations on the mainland, where other banks must adopt the official lending rate.

John Tan, head of global markets at Standard Chartered Bank in Hong Kong, said Qianhai was important to Hong Kong and the city's banking industry as it gave banks another alternative to deploy their surplus liquidity.

"It will also help the development of an offshore yuan yield curve, fixing as well as interest-rate hedging instruments," Tan said.

"The scheme will also help invigorate the flow of yuan between Hong Kong and Qianhai, taking internationalisation of the yuan a step further as China slowly opens up its capital account.

"The move will boost Hong Kong's leading position as an offshore yuan centre as it enjoys its first-mover advantage."

The scheme will benefit mainland companies, Tan said, because the offshore yuan lending rate is cheaper than the interest rate for borrowing from mainland banks.

Tan feels cross-border lending is only the first step in growing cross-border co-operation.

"We expect more flexibility in future for companies in Qianhai to deal with banks in Hong Kong on different financial products. Such banking relationships could see new benefits for clients and banks down the road."

Tan also believes the overall level of lending will be increased.

"According to past experience, Beijing will relax the policies after the pilot schemes when it feels they are progressing in the right direction … we believe China will gradually raise the quota under the Qianhai cross-border loan scheme when the time is ripe," he said.

Tan pointed to the fact that when Beijing first allowed yuan trade in mid-2009, only 365 companies were allowed to do so. It has since been opened up to all companies in the country.

Hang Seng Bank executive director Andrew Fung Hau-chung said Qianhai could play a play a key future role in in yuan liquidity between Hong Kong and the mainland.

"The Hong Kong banking sector can borrow onshore via the Qianhai operation if offshore market liquidity is tight and vice versa if offshore liquidity is excessive," he said.

"If effective, there will be no issue with the size of the liquidity pool in the future."