Analysts divided on impact of Qianhai-BVI move on Hong Kong

Qianhai, the special economic zone in Shenzhen intended as a test bed for China's yuan liberalisation and financial reforms, has strengthened its financial co-operation with the British Virgin Islands (BVI), a leading offshore tax haven, but analysts are divided as to whether the move will be a threat or a benefit to Hong Kong.

"This should be a tell-tale sign for Hong Kong that Shenzhen and Qianhai may present some competition, at least from the eyes of BVI," said Patrick Yip, deputy tax managing partner at Deloitte Touche Tohmatsu.

"What if Qianhai one day could do some or most of what Hong Kong is currently doing? It would therefore make sense for BVI to develop its relationships with Shenzhen and Qianhai as opposed to relying on Hong Kong for indirect China business."

Qianhai, a 15 square kilometre zone on the west coast of Shenzhen, will benefit from its proximity to Hong Kong, a major international financial centre, and its location in Shenzhen, the third-largest financial hub on the mainland, Li Qiang, the deputy director general of the Qianhai authority, said on the sidelines of the Asian Financial Forum in Hong Kong.

The BVI signed a memorandum of understanding (MOU) with the Qianhai authority and another MOU with the Shenzhen government last Friday.

The MOU with Qianhai sets out each parties' intentions to promote co-operation in the financial industry, the BVI government website said. The MOU with Shenzhen will expand co-operation in tourism, economy, culture, sports and other areas, it said.

The Qianhai MOU should boost investment across four sectors in the region around Qianhai - finance, logistics, information technology and professional services - Elise Donovan, executive director of the BVI International Finance Centre, told the South China Morning Post.

"From the BVI's perspective, the main objectives of the trip are to strengthen relations with the Qianhai Shenzhen-Hong Kong Modern Service Industry Co-operation Zone with a view to increasing international investment to the region," Donovan said.

Shenzhen party secretary Wang Rong said: "As one of the world-renowned offshore financial centres, BVI is not only an important source of foreign capital for China but also a major platform for Chinese capital to go global."

Last year, BVI set up its Asian headquarters in Hong Kong, which Wang said would create more favourable conditions for co-operation between Shenzhen and Hong Kong.

Carmen Ling, Standard Chartered global head of renminbi solutions, said closer ties between Qianhai and BVI would not be a threat to Hong Kong.

She likened Qianhai's role to that of Luxembourg, which performs middle-office financial service functions for Europe's financial sector. "Qianhai can be China's Luxembourg, an asset management centre. We [Hong Kong] are the front-end financial centre," Ling said.

Hong Kong can work with Qianhai to serve as a bridge from the mainland to international markets, said Ngan Kim-man, head of cross-border and yuan business at Hang Seng Bank.

John Bruce, Macau director of risk consultancy Hill & Associates, said Shenzhen will not pose a big challenge to Hong Kong which is "a much stronger and more established place for people to do business", he said.

Given the pressure by the US and European Union on the BVI to be more transparent, the British overseas territory's closer ties with Shenzhen and Qianhai might be perceived negatively, Bruce said.

Hong Kong will not "lose sleep" over closer ties between BVI and Qianhai, a Hong Kong-based hedge fund manager said.

"Qianhai is still an experiment. I haven't seen any of my friends relocating from Hong Kong to Qianhai," he said.

That may be gradually changing. Last month, Hang Seng Bank signed an MOU with Qianhai with a view to possibly setting up an office there, Ngan said.

Li said Qianhai hopes to promote a greater flow of yuan from Hong Kong to the mainland, through transactions such as cross-border yuan loans, and a push for the yuan to leave the mainland for overseas markets.