Investors want more details on Qianhai
International players keen on entering the special economic zone but say they need clearer picture on how to transfer funds in and out
International investors are interested in Shenzhen's Qianhai special economic zone, earmarked as a testing ground for free convertibility of the yuan, but they want a clearer picture of how it will operate.
Brett McGonegal, the chief executive of Reorient Financial Markets, said it had been talking to three private equity funds - two mainland and one global - on potential partnerships.
"There have been a lot of international investors showing interest in Qianhai since the beginning of this year," McGonegal said. "But they would need to have more details about how and when they can transfer funds in and out after their investment."
The mainland's closed capital account means funds cannot flow freely in and out. In June last year, Beijing said Qianhai would be a testing ground for free yuan convertibility.
In January, it allowed 15 international and mainland lenders based in Hong Kong to offer a combined two billion yuan (HK$2.5 billion) in loans to Qianhai companies for construction work.
McGonegal said that besides the cross-border loans, officials had also indicated they would allow private equity funds to invest in Qianhai companies.
"However, we are not clear about how funds would flow in and out of Qianhai," he said. "Can private equity funds based outside Qianhai take advantage of the privileged fund status afforded under the regulations? If not, can foreign funds which set up in Qianhai have free flow of funds and currency convertibility in Qianhai only? Or also into China?
"Fund houses would also like to know when and how they can transfer funds out of the country after the investment. As always, the devil is in the details."
McGonegal said he did not think Qianhai would replace Hong Kong, but the two could be partners.
"Hong Kong has been a base for international companies for years and that could not be replaced overnight. Qianhai is only one hour by car from Hong Kong and I believe many investors will use Hong Kong as a base."
McGonegal said fund houses would also be interested in a proposed third qualified domestic institutional investor scheme to allow companies in Qianhai to invest in Hong Kong markets.
The mainland's capital controls mean mainlanders can only invest overseas through the QDII scheme, under which they can buy fund products designed by mainland banks and fund houses granted quotas to invest in Hong Kong or overseas markets.
The regulator last year considered introducing QDII2, allowing individuals to trade Hong Kong securities directly. The plan is yet to proceed.
"The new government leaders have shown they have the determination to reform the capital markets and banking system," McGonegal said. "Qianhai could prove to be the stage to demonstrate this determination."
He said he was not worried about the recent turmoil in the market and volatility in the overnight bank rate because they were results of the government's desire to rein in shadow banking.
The government would sacrifice economic growth and short-term market gains for fiscal reform and discipline among banks and trust firms, he said.