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Currency Experiment in China Off to Disappointing Start

Just over the border from Hong Kong, lies Qianhai, China –  or, to onlookers, one massive construction zone.

While Qianhai may appear to be just another common, giant concrete mass of a city that is being developed, like many others in China, it’s not quite the same.

This city been designated as the site for China’s latest, slow but steady, attempt at making their currency, the yuan, or RMB, fully convertible.

The Chinese yuan is on track to stand amongst the world’s most important currencies – that is, if it can manage to become totally tradable. Currently, in a strictly controlled band against the USD, it’s trading at record highs.

So, the unique economic zone in Qianhai would work something like this:

The banks in Hong Kong will be permitted lend the Chinese yuan to businesses that have opened up their establishments in this new city, but using the reserves they have previously built up. But what’s more is that now, unlike ever before, the Hong Kong banks will also be able to set their own independent interest rates for these loans.

Both Stan Chart and HSBC are among the 15 some banks that have agreed to issue $327 million (USD) worth of loans for the 26 projects.

Reporter Tara Joseph comments however that, “… after being announced last year with great fanfare, not much is happening yet.”

Chan Yan-Chong has been tracing Qianhai’s development from City University in Hong Kong:

Nearby at the City University in Hong Kong, adjunct professor in the Department of Management Sciences, Chan Yan-Chong, has been observing the development of Qianhai.  Chan remarks on the progress: “Why they [the Central Government] take such a long time? Because they are very cautious. They have to balance the so many different requests from other cities. For example, why Qianhai? Why not Shanghai?”

Currently, there are several of these particular economic zones spanning China. And many other cities are competing for new zones to be implicated where yuan can be traded feely, including the powerhouse, Shanghai.

Due to foreign investments on the decline, China is considering whether or not to ease up on the some of the restrictions in these zones in order to enhance business.

Further, real estate in China is flooding in, without buyers or occupants, which is producing an array of ghost towns across the country.

Wang Yongsheng, sales director at one of Qianhai’s new residential towers, explains that, “I think at the moment Qianhai’s property market is running a bit hot. People are getting a bit ahead of themselves. This kind of thing has happened before, for example when people speculate on land near new subway projects.”

Chinese authorities may have ambitions to make the country’s capital account convertible. But as Qianhai’s landscape shows, progress is still slow — and there’s no guarantee this will be the first, or the only, zone to benefit.

The fact of the matter is, despite the ambitious attempts for a fully convertible currency, Qianhao is proving that progress remains very slow. In addition, there isn’t any guarantee that this will be the first, or solitary, zone to reap the benefits.