More reforms called for Qianhai economic zone

Qianhai,  the special economic zone in Shenzhen intended as a test bed for China's yuan liberalisation and financial reforms, should step up efforts to unshackle financial and trade restrictions, with cross-border interbank yuan lending and customs integration the key areas in need of further reforms, say business leaders.

A stone's throw from Hong Kong, Qianhai should open up yuan lending between banks on both sides of the border, which would ease the offshore yuan liquidity crunch seen in Hong Kong following the shock devaluation of the currency, said John Kam Hou-yin, who heads the Shenzhen branch of the Bank of East Asia.

"Cross-border interbank lending is in great demand and of great urgency," Kam said at a government-business dialogue on Wednesday marking the 35th anniversary of the Shenzhen special economic zone.

The spread between onshore (CNY) and offshore yuan (CNH) jumped to almost the highest in a year after the People's Bank of China changed the yuan fixing mechanism leading to the devaluation.

The gap hit more than 1,000 basis points on Tuesday and fell about 700 on Wednesday. That fuelled cross-border arbitrage, draining yuan liquidity in Hong Kong as the CNH interbank offered rate rose to a record high.

"If Hong Kong, as the biggest offshore yuan centre, has no liquidity, neither will other places such as London or Singapore," Kam said. "Coupled with the declines in US$/CNY forwards that heighten further decline expectations, it is complicating the ultimate goal of bridging CNH and CNY to make yuan fully convertible."