In Qianhai, Shenzhen considers next leap

We have been banging the drum since our launch about how the Greater Bay’s three special zones are likely to take the lead in exploring some radical changes for the region and, by extension, the country. Today we take a quick look at a fascinating document that came out in Shenzhen media late last week, laying out some legal and administrative reforms the city is considering. There is still much parsing and tea leaf-reading that needs to be done on this, but it would appear that a new leap forward is being considered by the city that launched China’s open-door policy 40 years ago.

Just as China created Shenzhen as a special economic zone back then, with a mandate to experiment (black cats, white cats and mice), so it would appear that Shenzhen is going to use its own special economic zone of Qianhai to go boldly where China’s richest city wants to go next.

In plain language, the city has launched a legislative process for what looks to be a new mini-constitution for Qianhai. The “Regulations on the Free Trade Zone of Shenzhen’s Qianhai Shekou” is currently being distributed so that the city government may solicit public opinion on the draft.

It said the “Regulations” have been founded on four key principles. These are, in order: 1) The rule of law; 2) Innovation; 3) Openness; and 4) Cooperation among Shenzhen, Hong Kong and Macau.

Innovation and openness are no-brainers. But rule of rule of law and the principle of cooperation between Shenzhen, Hong Kong and Macau are making their debut in legislation covering the administration of Qianhai.

Here is perhaps the most important clause of the Regulations: “The Shenzhen Municipal People’s Government shall delegate its management authority for the development of the free trade zone to the Free Trade Zone Management Committee, and the Free Trade Zone Management Committee shall be the dispatching agency of the municipal government and operated as a statutory body.” (Our translation.)

The “Regulations” also propose the establishment of an advisory committee with domestic and foreign professionals as members, as well as the establishment of a comprehensive administrative law enforcement agency that can “exercise administrative penalties”.

Here is the most intriguing part of the document: The “Regulations” propose to “speed up the construction of a legal system that covers basic legislation, development legislation, supporting legislation, and adapt to the development of an open economy”.

It is not high-minded academic stuff being considered here, as far as we can see. There is detail. For instance, the “Regulations” include some specific institutional innovations in areas of legal cooperation between Shenzhen, Hong Kong and Macau, such as exploring the possibility of appointing qualified Hong Kong and Macau legal professionals to participate in foreign-related cases, and appointing “expert judges and prosecutors” who are proficient in trade rules, finance, intellectual property rights and international commercial law.

In terms of facilitating trade, investment and financial innovation, the “Regulations” include a number of initiatives. Most important is for Qianhai to have its own “negative list” (of industries that are off-limits to foreign investment) more in line with “international rules”.

The “Regulations” hint at more. There is a clause stipulating the “implementation of experimental policies and measures for foreign investment”. This includes managing industries outside the negative list on the same basis for foreign and domestic investors. Could that mean bringing these industries into line with international norms of governance? What might that mean? We don’t yet know. But it does say that the goal is to “gradually eliminate or relax access barriers for foreign investors in the sectors of finance and major scientific and technological research and development”.

Some will obviously start out more equal than others. This being the GBA, the “Regulations” say they will explore putting Hong Kong and Macau investors on the same footing as locals. Current restrictions on Hong Kong and Macau investment in the fields of finance, education and law, will either be “canceled or relaxed”.

The biggest prize is clearly being held out in the financial-services sector. The “Regulations” put forward a number of measures for private and foreign capital. These include “taking the lead” in exploring the “implementation of equal equity investment ratio in banking between the domestic and foreign investors,” as well as “supporting qualified commercial banks to pilot the foreign currency offshore business”. As part of this, foreign banks would be encouraged to set up branches and sub-branches in the free trade zone that could be gradually allowed to “expand the scope of foreign-funded banking”.

Although no timetable has been given for any of this, the light at the end of the tunnel is pretty bright, in our view. Full convertibility of the RMB in Qianhai? It’s obviously being considered, if not explicitly expressed, by this document. The “Regulations” also proposes to “steadily promote the convertibility of capital on an investment, support the corresponding institutions to open investment and financing accounts on the project, and freely settle foreign exchange within the statutory limits”.

We will follow up on this in coming days.

Read more (in Chinese).