With job cuts still hounding cross-border finance, a key question for the unemployed in the banking world is how to penetrate the next frontier – the great financial wall of China.

The good news is that a little crack may have just opened, in the form of the Qianhai special economic zone, which dreams of becoming the “Manhattan of Guangdong” by packaging itself as the renminbi (RMB) trade settlement centre. The bad news is that, without much differentiation from other financial-capital wannabes across China, Qianhai may turn out to be yet another mad mainland scheme.

“I haven’t seen any immediate differentiator yet,” says Chris Chan, a professor of Ivey Business School in Asia. “Qianhai can borrow from Hong Kong’s expertise, but it needs to differentiate itself, especially vis-à-vis other zones, such as Shanghai’s Pudong.”

Chan cites “positive speculation” about Qianhai’s prospects, especially as it can benefit Hong Kong with its potential to offer “profitable channels” for offshore RMB deposits, a big chunk of which is parked in Hong Kong in the form of RMB deposits and other yuan-denominated financial products.

“However, similar zones have been set up, such as those in Tianjin and Bohai, in the past 5-10 years,” Chan says, adding that these cities have not really taken off as financial capitals. “Qianhai must be careful in positioning itself.”

SPECIAL STATUS

Slightly more than a decade ago, Hong Kong won the highly coveted designation as the offshore centre for RMB, creating a virtual parallel world where RMB can be traded.

Lured by slightly higher interest rates for RMB-denominated deposits, hordes of Hong Kong savers have been trooping to authorised banks to open such accounts. Companies doing business in China and investors have also built up a hoard of RMB-related holdings, such as so-called dim sum bonds, to help them settle deals traded in RMB and offer new investment products to clients.

Given the lucrative returns from RMB-related business, other global financial capitals set up their own RMB windows, led by Singapore for Southeast Asia and London in Europe.

“However, RMB assets are just sitting there, with no investment opportunities because of restrictions,” says Chan.

In effect, RMB-denominated assets in Hong Kong, Singapore, London, Taiwan and other financial centres were being kept out of the mainland capital markets. Eventually, however, mounting pressure from the mountains of offshore RMB assets prompted mainland authorities in 2011 to allow for limited access to Chinese stocks and bonds through the Renminbi Qualified Foreign Institutional Investor (RQFII) programme.

LIMITED OPTIONS

This scheme is the RMB version of the decade-old Qualified Foreign Institutional Investor (QFII) programme that allowed foreign entities to buy and sell yuan-denominated “A” shares on the mainland stock exchanges in Shenzhen and Shanghai based on a quota that stood at about US$42 billion as of March 2013.

Initially, RQFIIs were granted to Hong Kong subsidiaries of qualified mainland asset management and securities firms. This has allowed them to channel RMB raised in the city to invest in the mainland capital markets, with 20 per cent allocated to stocks and an 80 per cent cap on fixed-income assets such as bonds. In June this year, Hang Seng Investment Management – the investment arm of Hong Kong’s Hang Seng Bank – got its RQFII licence, breaking the monopoly of mainland-linked institutions.

 According to China’s State Administration of Foreign Exchange (SAFE), the total RQFII quota stood at RMB121.9 billion as of end-July this year, a mere drop in country’s capital-market ocean.

“The RQFII is a vehicle to allow RMB funds in Hong Kong, Singapore and other markets to invest in China,” says Chan. “But there is an annual limit, so the investment options for RMB assets remain limited.”

ENTER QIANHAI

As announced in June 2012, Qianhai – a 15 square-kilometre special economic zone built largely on reclaimed land in Shenzhen and near Hong Kong – will serve as a testing ground for free RMB convertibility. This means that, if all goes according to plan, companies registered in Qianhai can act as conduits in buying and selling RMB-denominated financial products between the special zone and the rest of the world, thereby bypassing China’s notoriously closed capital-account regime and going beyond the limits imposed under the QFII and RQFII programmes.

It is a very attractive proposition, and so far, Hong Kong-based players such as HSBC, Hang Seng Bank and Bank of East Asia say they hope to serve Qianhai residents and businesses via their newly approved offices in Shenzhen.

Just last month, veteran fund manager Mark Mobius – executive chairman of US fund house Templeton Emerging Markets Group – says they may set up a subsidiary in Qianhai to help sell on the mainland Hong Kong-domiciled mutual fund products. Templeton manages US$50 billion in assets, spread across emerging markets, including China.

In a pioneering deal, 15 mainland and foreign lending institutions based in Hong Kong have been allowed to offer the first cross-border loans to companies involved in construction work in Qianhai.

JOBS GALORE

On the jobs front, property and construction are expected to lead the way in Qianhai, followed by hotels and tourism. Not far behind are the financial engineers.

“We think Qianhai will become an established onshore platform for most Hong Kong and international financial institutions currently operating in the region, and I’m sure it will attract others that aren’t yet,” says Shenzhen-based Mark Tibbatts, director for southern China at Michael Page International. “It will also be a key platform for Chinese institutions to invest in Hong Kong and overseas and, as such, we expect to see a strong mix of both.”

Tibbatts and his team expect to see the usual population of investment and commercial banks, asset managers, securities houses and investment funds all establish operations in Qianhai initially. “We also expect to see both front and back office operations located there over time,” he adds.

Not that Qianhai will be giving Hong Kong a run for its money anytime soon. “With Qianhai still very much in an embryonic stage, there is no comparison to make,” Tibbatts says. “Hong Kong will always remain one of the world’s premier destinations and its appeal as a place to live, work and raise a family are strong pulls. Qianhai, in contrast, will be brand new, extremely modern and very appealing in that sense.”

Chan, the Ivey professor, also sees Qianhai as an attractive option for people familiar with investment, fixed-income and equity markets on the mainland. “It may offer specialised job types, such as in commercial banking or foreign exchange trading,” he says.

NO THREAT - YET

Like Tibbatts, Chan does not see Qianhai as an immediate threat to Hong Kong in terms of attracting talent. “Qianhai still needs the right infrastructure and quality of life. However, it is basically a suburb of Shenzhen and Hong Kong, so I expect most people who will eventually work in Qianhai to commute to their homes in Shenzhen and Hong Kong, which still provide better lifestyle options,” he says.

To attract even more investors and talent, Qianhai will offer qualified enterprises a corporate income tax of 15 per cent compared with 25 per cent for the rest of China and 16.5 per cent in Hong Kong. Personal income tax for qualified professionals will be ‘equalised’ for an effective rate of 15 per cent, similar to Hong Kong’s. It will also drop business taxes on certain insurance income and offshore outsourcing services.

“Another potential advantage will be for employers, as housing allowance will be lower, assuming that rents will be below Hong Kong rates,” Chan says.

Qianhai is also dangling other lifestyle-related incentives. “We don’t see a huge salary discrepancy between comparable financial-services jobs in Qianhai and Hong Kong, but as with any market, we do expect to see a degree of competition in terms of remuneration from both cities, where the best talents are concerned,” says Jesaline Huang, a senior manager at Michael Page Shenzhen.

“If recent development projects in Shenzhen are anything to go by, then working and living conditions will be first class in Qianhai and we expect it to be cutting edge from a design and aesthetic stand-point also,” she adds. “To my knowledge, international creature comforts will be abundant while education, health, general residential infrastructure and consumer services will be equally highly competitive.”

MURKY POLICIES

Based on sketchy reports, private equity funds based in Qianhai may be allowed to invest in mainland projects. However, it is not clear if other classes of funds, such as mutual funds, will also be given such access. It is also uncertain if HK-domiciled mutual funds will be recognised in Qianhai and the rest of China, and vice-versa, although high-level discussions on this issue are ongoing.

It is these uncertainties that make Chan feel “positively cautious” about the prospects of this self-proclaimed new Manhattan. “There is insufficient clarity in terms of underpinning regulations,” he says. “But once cleared up, there can be advantages for people seeking China investment-related careers.”

Chan also sees first-mover advantage for companies daring to set up shop in Qianhai even though the policy infrastructure is still very much skeletal. “Moving to Qianhai now can be a low-cost strategy, as companies don’t need large offices, and there’s no need to move a huge number of people. Companies can just have a small presence to be ready when regulations are finalised,” he says.

“People involved in funds or private equity who are not yet familiar with the mainland market can also be in a good position if they move into Qianhai now as they have the chance to meet potential clients and business partners before the competition,” Chan adds.

INTERNAL COMPETITION

Still, Chan says Qianhai’s prospects depend on the “product” itself. “The foundation looks good, but Qianhai needs to produce its financial products first. And so far, there’s nothing there.”

Worse, other Chinese cities are busy preparing their own competing products. 

Almost at the same time that the Qianhai scheme was announced, Beijing also revealed plans to create a free-trade zone in Shanghai.

The approximately 29 square kilometre zone, located in the city’s eastern district of Pudong that includes the Waigaoqiao duty-free zone and Yangshan port, will be officially launched on September 27, according to a South China Morning Post report.

Within the zone – just as in Hong Kong – foreign banks will be permitted to establish wholly owned units, mainland banks could offer offshore banking business, while foreign commodities exchanges and trading companies would be allowed to own warehouses.

It is not clear though what extent of businesses these entities would be allowed to engage in. There is talk that the free-trade zone may eventually be expanded to cover the entire 1,200 square kilometre Pudong New Area special economic zone, which was created in the early 1990s and patterned after its highly successful Shenzhen sister in the south.

SOUTHERN DISCOMFORT

Adjacent to Macau and three times the size of the world’s current gaming capital is the 106 square kilometre Hengqin island special economic zone. The island used to be dominated by oyster beds but hopes to become a mecca for tourism, gaming, health care and creative industries. So far, Hengqin has attracted Hong Kong companies such as eSun, Shun Tak Holdings, Lai Fung Holdings of Lai Sun Development, as well as a massive satellite campus of the University of Macau.

North of Hengqin and west of Qianhai is Nansha, which also aims to attract hi-tech, tourism, logistics and academic-institution investors.

With the proliferation of such zones across China, a key issue is how financial-sector locators can penetrate the domestic mainland financial-services market, amid concerns over hot money inflows and regulatory control over financial products.

FINANCIAL ENGINEERS

In any case, the flurry of construction across the Pearl River Delta can only be good for Hong Kong’s financial services industry, as property developers issue bonds to fund their projects or list their assets on the exchange, for example.

“The first wave of people moving to Qianhai will be in structured financial products, people who can do financial product development,” Chan predicts. “There will also be opportunities for property developers in mixed-use projects.”

These developments mark another chapter in the economic integration of southern China and the motherland’s prolific birthing of Hong Kong clones. And that, in the final analysis, can only be good for the city’s daring and enterprising financial talents.

“Hong Kong is a global financial hub, and while it’s proximity to China has been hugely advantageous, the development of Qianhai isn’t going to jeopardise its reputation among financial-service industry professionals worldwide,” Tibbatts says. “If anything, it should enhance the strength of Hong Kong’s capital markets significantly.”