MCLC: China's answer to Wall St.

[Denton, Kirk]

MCLC LIST
From: kirk (denton.2 at osu.edu)
Subject: China's answer to Wall St.
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Source: NYT (4/2/14):
http://dealbook.nytimes.com/2014/04/02/a-financial-center-is-envisioned-on-
a-muddy-tract-in-southern-china/?ref=asia
 

A Muddy Tract Now, but by 2020, China’s Answer to Wall St.
By NEIL GOUGH 

There isn’t much to see in Qianhai today except for a tract of muddy,
mostly undeveloped land that has been reclaimed from the sea in the
southern Chinese city of Shenzhen, near the border with Hong Kong.

A gleaming meeting hall built by the local government to host potential
investors sits largely marooned, surrounded by dusty plots of new land
that run for miles in every direction. The steady clang of passing dump
trucks fills the air.

Six years from now, officials here envision, Qianhai will be a thriving,
international finance district in Shenzhen that will stand shoulder to
shoulder with Wall Street, the City of London or Hong Kong’s Central
District. The local government anticipates a working population of 650,000
people generating annual gross domestic product of around $25 billion in
Qianhai by 2020 — plans that call for total investment of nearly 400
billion renminbi, or about $65 billion.

But Wall Street and its counterparts didn’t become global financial
centers by way of government fiat. For China, the challenge is
fundamental; gently easing the state’s grip on the financial system after
decades of heavy-handed control. It’s a bold blueprint, but, so far, not
much more than that.
Tyrone Siu/ReutersNew residential buildings for sale near the Qianhai
special economic zone in Shenzhen, China.

Qianhai is one of more than 10 newly created or proposed special zones,
including the better-known Shanghai free trade zone, where China plans to
experiment with a new wave of financial overhauls.

The changes, first outlined in November by President Xi Jinping, serve as
a recognition of the dangerous imbalances created by the investment-led
growth model that has powered China since the financial crisis. Policy
makers want to deflate these risks by reining in the nation’s reliance on
cheap debt, modernizing the state-controlled financial system and
refocusing the economy on domestic consumption.

One crucial component of this strategy is to ease government currency
controls, allowing a freer flow of Chinese money into foreign stock, bond
and property markets and granting overseas investors more access to
domestic markets. Here, Qianhai hopes to play a major role.

It is a risky proposition. Many nations have been thrown into financial
turmoil after moving too quickly to loosen currency controls and open
their financial markets.

Some analysts say China’s leaders have little choice. They argue that
continuing to rely on credit-fueled investment for growth will only delay
China’s day of economic reckoning, raising the risk of even bigger
problems down the road.

“Opening the capital account and pushing ahead with overall financial
market reform is absolutely crucial for sustaining higher growth rates
than the rest of the world,” said Diana Choyleva, the head of
macroeconomic research at Lombard Street Research in London. “If they
don’t go down the route of reform now, and they get cold feet and go back
to just throwing money at the economy to get growth, we are going to have
a whopping big financial crisis within a couple of years.”

Analysts have described Mr. Xi’s proposals as the biggest changes to the
country’s financial landscape in decades. Officials in Qianhai are fond of
pointing out that Mr. Xi’s first trip outside Beijing after taking over as
head of the Communist Party in late 2012 was to Shenzhen and Qianhai,
where he spoke of national rejuvenation and the pursuit of what he has
called the “Chinese dream.”
“The goal of Qianhai is to be a dream factory for the Chinese dream,” said
He Zijun, deputy director of the Qianhai Authority, which administers the
zone.

Mr. Xi’s southern tour was symbolic. Many Chinese instantly recognized it
as a tribute to a famed 1992 trip to Shenzhen by Deng Xiaoping, the
paramount leader who in 1978 began China’s transformation into an economic
powerhouse. Deng loosened the state’s grip on the economy, using Shenzhen
as a petri dish for experiments in freewheeling capitalism.

“For the past 30 years Shenzhen has led the reform and opening up process
in China,” Mr. He said. “In the future we hope that Qianhai can continue
to be a test ground for further reform and opening up, and we can set an
example for all other regions.”

Things are off to a modest start. Beijing gave the green light for
Qianhai’s unique status in 2010. Since then, local officials have
auctioned several blocks of land. Several banks, including Standard
Chartered and Hong Kong’s Hang Seng Bank, have opened small branch offices
in the district.

Few foreign investors have made major investments in Qianhai so far. But
players like Silverstein Properties, the developer of the new towers at
the World Trade Center site in New York, are starting to take note.

In January, Silverstein teamed up with a Chinese firm in a winning bid of
13.4 billion renminbi for a plot of land in the district — a record for
the city of Shenzhen. The developer acquired rights to a
550,000-square-foot site, where it plans to build offices, retail outlets,
service apartments and hotels covering a total floor area of nearly five
million square feet, more than twice the floor area of the Empire State
Building.

“Thanks to its policies, location, transportation access and world-class
architecture, I believe that Qianhai will become one of the most
successful business districts in the world,” Marty Burger, the chief
executive of Silverstein, said in a statement last month.

In an effort to attract the foreign investors needed to fill all those
offices, Qianhai officials frequently promote the district’s 15 percent
corporate tax rate — compared with the 25 percent national rate and 16.5
percent in nearby Hong Kong. But details of how to qualify for tax breaks
have yet to be released by the country’s Ministry of Finance, which is
concerned about the effect it might have on other Chinese cities,
according to Peter Kung, a senior partner responsible for southern China
at KPMG.

In Shanghai’s free trade zone, which was officially opened in September,
officials have promised a sweeping relaxation of China’s current
restrictions on financial activity. In December, the central bank, the
People’s Bank of China, issued a 30-point proposal that included floating
interest rates and allowing foreign involvement in areas including
currency and futures trading and domestic bond sales.

But again, the details, have yet to be announced. Shanghai officials have
published a lengthy list of activities and industries that are off-limits
in the zone — with the implication that if something is not banned, it is
allowed. The so-called negative list closely mirrors China’s current
restrictions on foreign investment. For example, within the zone, foreign
ownership is capped at 49 percent for brokerages and 50 percent for car
factories — the same as anywhere else in China.

There also appears to be little consensus in China about how companies
within these special zones will trade or interact with companies or
customers in the rest of the country, or whether they will be permitted to
do so at all.

“Whilst they’ll be useful petri dishes for experimenting on open capital
accounts and everything else, I think they’ll be pretty limited in terms
of how they can operate because you still have to ring-fence the special
economic zone,” said Matthew Sutherland, the senior investment director
for equities in Asia at Fidelity Worldwide Investment.

Some see bureaucratic infighting as the most likely culprit behind China’s
delay. The proposals involve areas covered by at least 10 Chinese
government ministries and regulatory agencies.

“You have different regulators and they all have their vested interests,”
said Joseph W. K. Chan, a partner at the law firm Sidley Austin in
Shanghai. “The vast majority of them do not see eye to eye; there are turf
wars going on all the time.”

Mr. Chan said, however, that recent pronouncements by Shanghai officials
suggest that “a lot of the back-room horse trading has already taken
place.”

Robert Kung, the China country head at Bank of New York Mellon, said, “The
magnitude of this liberalization, this opening up, really depends on how
comfortable the government and the regulators feel.”