Offshore yuan loans in Qianhai to grow tenfold by 2015

Cross-border yuan borrowing in the Qianhai experimental zone is expected to grow tenfold by the end of 2015, said an official with the zone in Shenzhen, Guangdong Province, citing more yuan inflow from Hong Kong.

The Qianhai experimental zone is a 15 square km area of reclaimed land in the south China city of Shenzhen, the country's first special economic zone. The Qianhai experimental zone was established in 2010 to spearhead China's financial reforms, particularly the Renminbi's full capital account convertibility.

Authorities in Qianhai said more than 10 billion in offshore yuan loans had flowed into the zone in the year after cross-border yuan borrowing was first permitted in the area.

"Ten billion is not much, but it has huge implications for the full convertibility of the Chinese yuan," said Zhang Bei, director of the Qianhai Shenzhen-Hong Kong modern service industry cooperation zone administration.

Authorities hope to use Qianhai as a test ground to spearhead financial liberalization by taking advantage of the zone's proximity to Hong Kong, so far the largest offshore yuan center, with more than 960 billion yuan in its coffers.

The move to create channels for offshore yuan to flow back to the Chinese mainland officially kicked off last December, when the State Council, China's Cabinet, allowed yuan loans raised in nearby Hong Kong to fund projects in Qianhai at a cost negotiated between lenders and borrowers.

The program got off to a strong start, with 15 banks from Hong Kong agreeing to provide two billion yuan in funding for 26 projects in Qianhai.

Though few companies have disclosed the cost of their cross-border fund raising, most said that the interest rate negotiated between companies in Qianhai and yuan lenders based in Hong Kong is usually one to three percentage points lower than the benchmark lending rate on the Chinese mainland.

However, lending has since progressed slowly, reaching a modest 5.25 billion yuan in May, as Hong Kong lenders remained ambivalent over how the borrowed funds could be used in the Qianhai zone or elsewhere on the Chinese mainland.

Such concerns are underscored by Hong Kong authorities' intensive lobbying efforts to increase channels for the Renminbi to flow freely in and out of Qianhai through multiple vehicles such as bonds, stocks and private equity.

More than 2,600 companies have been incorporated in the zone so far, with registered capital of 200 billion yuan, but Hong Kong firms account for less than six percent of the total number of companies registered in the zone, raising doubts over Qianhai's attractiveness to Hong Kong investors.

Yet Zhang said earlier this month that despite Hong Kong firms' small share of Qianhai's total, they account for 12.5 percent of firms with registered capital of more than 500 million yuan, suggesting that the zone remains attractive to Hong Kong companies of relatively large size.

However, Qianhai could face competition from the newly established free trade zone in Shanghai, another rising outpost to carry out the Chinese government's stated goal of gradually opening its largely sheltered financial sector.

The Shanghai zone has the potential to divert the attention of Hong Kong investors from Qianhai, but officials in Qianhai are confident that the zone will distinguish itself.

Wang Jinxia, a spokesperson for the Qianhai authorities, said last week that Qianhai is more focused on greater opening of the financial sector, while Shanghai's zone focuses more on liberating the trade of goods and services.