Shenzhen nibbles at Hong Kong’s lunch

The central government has decided to widen a pilot project for Renminbi inward convertibility from the Qianhai special zone to the rest of Shenzhen. On its own, this development is not earth-shattering, as any bank in the city with a Qianhai branch has been able to easily convert foreign currencies to RMB for more than a year now. But the reason given for the change ought to make Hong Kong bankers nervous. It is for the country to “advance liberalization of the capital account”. 

Pilot firms will not need to provide documentation about each foreign exchange transaction regarding their capital accounts and, instead, banks may do random inspections, the State Administration of Foreign Exchange announced on its website. Capital account items in this context could, for example, involve funds secured by going public overseas or debt. 

The move came less than a month after the Shenzhen Foreign Exchange Bureau issued detailed implementation guidelines for pilot reforms of foreign exchange in Qianhai. As of June this year, 71 companies in Qianhai were approved for this service, and they have received a total of US$1.49 billion. That is peanuts compared to Hong Kong’s daily forex turnover of US107 billion (in 2018), of course. But it’s a start.

The latest notice has opened the service to all companies registered in Shenzhen. Pilot firms must be non-financial companies, excluding real estate firms and government-backed financing platforms. And even then, only the best may apply: if the company is listed in the Customs Department’s list of foreign exchange income and expenditure, it must be in category A or above, meaning it has not violated any customs regulations in the past year, or have a blemish related to intellectual property rights, or have any issues with the tax department. The company must also have an annual import and export value of US$500,000 or above. 

The SCMP has a longer report on this that is worth reading. After having run a conference earlier in the week at which the idea of Shenzhen eating Hong Kong’s lunch was dismissed with a wave (literally), the report doesn’t ring alarm bells. Hong Kong’s principal liaison officer in Qianhai was quick to point out the obvious, that this is more symbolic rather than practical.

We, too, believe Shenzhen has a long way to go to threaten Hong Kong’s position as China’s key conduit for inward and outward investment. But the question on everyone’s minds right now, as the city’s Chief Executive seriously considers the usefulness of emergency powers in quelling protests, is exactly how long Hong Kong has left on its monopoly business. 

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