- POSTED: 26 Sep 2013 23:11
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A free trade zone planned for Shanghai may pose some threat to Hong Kong's role as the pre-eminent hub for offshore yuan trading. Some analysts said it should serve as a wake-up call for Hong Kong to re-invent itself.
HONG KONG: A free trade zone planned for Shanghai may pose some threat to Hong Kong's role as the pre-eminent hub for offshore yuan trading.
Some analysts said it should serve as a wake-up call for Hong Kong to re-invent itself.
Hong Kong's thriving success as a financial, trading and shipping hub is based on the notion of free trade.
Its open markets and liberal society make for a near-perfect market economy.
Furthermore, as the gateway to China, it is a natural centre for offshore trading of the yuan.
But now China is gearing up to launch its first major free trade zone in Shanghai.
The district of 30 square kilometres has been designated as a test-bed of future financial reforms.
It will likely feature liberalised interest rates, fewer restrictions on foreign investment and freer convertibility of the yuan
Tai Hui, chief market strategist Asia at JP Morgan Asset Management, said: "Whether international banks and Chinese banks will see capital float in and out of that zone into the global market, I think that could well be a challenging point for Hong Kong.
"But again, I see this more as a long-term competition rather than something that will pose a credible threat in the next three or four years, simply because that is still a very small part of China. And also, the capital flow in and out of that zone with the rest of China is still going to be restricted."
Still, analysts said competition is a good thing and Hong Kong should seize the opportunity.
Dr Enzio von Pfeil, a senior advisor at MCL Partners Ltd, said: "It is going to benefit Hong Kong because there is going to be increased foreign exchange activity coming through Hong Kong driven by two things. One, by increased yuan trading. Two, by increased yuan-dollar, yuan-yen... what we call forex-trading, cross trading.
"I think that is where we specifically can really make a lot... to do again what China cannot do, which is to provide this forex trading pan-China through Hong Kong, as opposed to just having this go through a free trade zone in Shanghai. Because we have a much bigger infrastructure."
To avoid becoming "just another Chinese city", analysts said Hong Kong must boost its international appeal, such as tackling pollution and developing other industries apart from property.
Tai Hui said: "It is very important, not necessarily a wake-up call, but a reminder that Hong Kong needs to stay competitive and needs to continue to re-invent itself in order to deal with all this new competition.
"Because at the end of the day, as China continues to open up and continues to become more international, you cannot protect Hong Kong's own interests forever."
The so-called "great firewall of China" has long been a gripe of many foreigners living and doing business in mainland China. But a report out this week said the Shanghai free trade zone will allow access to banned sites such as Facebook, Twitter and The New York Times.
Analysts are quick to point out that this free trade zone is a pilot project only, and while it may test-run freer economic and social policies, what eventually goes on there may just stay there.