With the establishment of the China (Shanghai) Pilot Free Trade Zone, should Hong Kong feel threatened?
It should, according to a senior executive of professional accounting body CPA Australia.
“In three years’ time, the Shanghai free trade zone (FTZ) will pose a serious threat to Hong Kong [as a leading Asian financial hub] as Shanghai allows foreign banks to set up joint ventures inside the zone,” Peter Lee, divisional president for the Greater China region of CPA Australia, told EJ Insight in an interview.
Global companies will choose to set up headquarters in the experimental economic zone where they will enjoy a wide array of supportive measures from the government, Lee said.
“Before, a lot of banks came to Hong Kong because they wanted to tap into the Chinese market, but now, they may choose to locate at the Shanghai FTZ, rather than in Hong Kong,” he said.
In fact, the zone’s official website makes such a pitch: “Generally, in the past, most foreign investors entered China by setting up a branch in Hong Kong. Such practice will be changed by the opening of Shanghai FTZ.”
There’s no doubt that Shanghai, through the free-trade zone, is positioning itself as the better alternative to Hong Kong. This, despite assurances from Beijing that the city’s FTZ does not seek to threaten Hong Kong’s role as an international financial hub.
But competition between the two cities will result in “a bigger business cake for all, not smaller crumbs”, says a commentary from the official Xinhua news agency.
The Shanghai FTZ website has a section on “Shanghai FTZ vs Shenzhen Qianhai”, which compares the two places in terms of their positioning and advantages. The website argues that Shanghai has “a complete and comprehensive system” while Qianhai is only testing the concept of opening-up.
“In setting up the Qianhai New Area, Shenzhen intends to work with Hong Kong. Now, if Shanghai positions itself as a competitor of Qianhai, then it is setting itself up to compete with Hong Kong,” Lee said.
Many foreign investors will probably be attracted to Shanghai, which has direct access to the mainland market and is now a testing ground for full yuan convertibility, Lee said.
“The zone allows foreign investors to invest in China directly,” Lee said. “Shanghai will take over the international financial trading center from Hong Kong in the future.”
Offshore RMB hub
On Sept. 29, the Shanghai municipal government launched the city’s pilot FTZ, which covers 28.78 square kilometers and comprises the Waigaoqiao tax-free zone and logistics park, Yangshan port tax-free zone and Pudong airport tax-free zone. From Oct. 1, administrative approvals and other procedures in the zone have been relaxed, and a series of management regulations will be put in place.
Just about a year ago, the People’s Bank of China picked Qianhai, a 15 square kilometer special economic zone in Shenzhen, as the testing ground for full renminbi convertibility. Officials have said Qianhai would focus on its financial ties with Hong Kong, which is already the biggest offshore yuan center and is only an hour’s drive from Qianhai.
There is so much that Hong Kong can do to attract or retain the foreign banks, for example, streamlining the process of applying for a license, Lee said. “I know a foreign bank takes up to three years to secure a license in Hong Kong.”
Also, the city should learn from Singapore’s experience by rolling out measures to attract overseas talent and companies.
The challenge posed by the Shanghai FTZ should spur Hong Kong to review its positioning and business policies to maintain its advantage over Shanghai.
But Hong Kong also stands to gain if Shanghai succeeds in its FTZ experiment. The zone will offer a wide range of opportunities for Hong Kong companies.
Property developers, for example, can cash in on the growing demand for office and residential space from foreign companies in the zone, Lee said. Logistics and other service sectors will also benefit in the long run.
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