News that Shenzhen is pushing for financial reforms, including allowing its companies to take out yuan loans from Hong Kong banks and vice versa, pushed up stocks on Wednesday but the euphoria may have been premature.
Several of Shenzhen's proposed policies, such as establishing a commodities futures exchange and a reinsurance transaction centre have been stalled or were rejected by Beijing last month, according to a Shenzhen government document obtained by Caixin, which said other proposed reforms were still pending approval.
On Thursday, mainland websites cited documents from the Shenzhen government to report that the city was about to initiate major financial reforms, including making use of cheap yuan loans in Hong Kong to help develop Shenzhen's Qianhai new economic zone, and encourage more companies and financial institutions in Qianhai to issue yuan bonds in Hong Kong.
Yuan lending between Hong Kong and Shenzhen is supposedly one of the most important components of Shenzhen's reform plan. Bankers and analysts, however, are sceptical about its viability because of the huge gap between Hong Kong and mainland lending rates.
The average one-year lending rate in Hong Kong is about 3 per cent, while the one-year benchmark lending rate is 6.56 per cent on the mainland.
The fear is that allowing Shenzhen companies to access yuan loans raised in Hong Kong would create huge loopholes for mainland companies to arbitrage interest rates and lock in profit.
'This plan isn't very realistic, as companies from all over the mainland might run to Shenzhen to cash in,' said Stanley Li, an analyst at Mirae Asset Securities.
Lu Ting, a China economist at Bank of America Merrill Lynch, added that the policy could create more room for corruption.
'The question is, which companies in Shenzhen will be granted access to cheap funds in Hong Kong?'
Lu said only companies with connections might get that privilege in the initial stages.
Nathan Chow, an economist at DBS, was more positive, saying he expected reforms to be implemented as early as the third quarter of this year. The reforms needed to be in accordance with China's interest rate liberalisation, he added.
'If the reforms are approved, the offshore yuan lending rate would pressure onshore rates.'
Shanghai and Tianjin have also been vying for financial reforms. But changes like these may need more than efforts by local governments, due to issues concerning interest-rate liberalisation, capital-account control and the integration of the Hong Kong and Pearl River Delta economies, a long-debated topic.
Legislator Fred Li Wah-ming from the Democratic Party said Hong Kong's economic integration into the Pearl River Delta region was an 'inevitable trend' with the yuan's rising prominence.
The upside for Hong Kong was that integration could expand its influence as an international financial centre in southern China. But Hong Kong would need to be careful not to compromise its unique advantages, such as its legal infrastructure and regulatory regime, in such an integration process, local regulators and bankers have said.