The free trade zone mania has spread from Shanghai to Guangdong province. Late last year, the provincial authorities floated a grand scheme to establish a free trade zone in the prosperous Pearl River Delta region by combining the strength of Guangzhou, Shenzhen and Hong Kong.
As the plan appears to be at its infant stage, there are no details about the exact nature of the combination and it's not clear how the Hong Kong Special Administrative Region fits into a picture conceived almost entirely by officials in Guangdong.
The response from Hong Kong has understandably been lukewarm, at best, as what's in it for the SAR. Hong Kong is already a free trade region and has been one for over 100 years. It's hard to imagine what it can possibly gain from the proposed Guangdong free trade zone.
Of course, economic integration with the mainland in general, and the Pearl River Delta region in particular, has been widely considered to be of great importance to the future development of Hong Kong. Many politicians and business people have repeatedly warned that Hong Kong could be losing its relevance to mainland economic development. However, nobody has come up with any concrete proposals, they simply keep urging the Hong Kong executive to establish new and closer cross-border links.
Before embracing the idea of joining hands with Guangzhou and Shenzhen to form a new economic zone, Hong Kong will have to think hard about how best to balance its interests. Some commentators have noted that the proposed Guangdong free trade zone would be too big a potential competitor for Hong Kong to ignore. Instead of competing with it, Hong Kong should simply try to join it, they argue.
But past experience has shown that potential impact on Hong Kong from the many projects proposed by mainland cities have tended to be exaggerated. Shanghai has been flagging its ambition to become an international financial center that can more than rival Hong Kong for years. But this rise to rivalry remains nothing more than an illusion.
The establishment of the China (Shanghai) Pilot Free Trade Zone did raise some real concerns in Hong Kong at the initial stage when the nature of the project was still unclear. After realizing that it was going to be an experiment based on free-market principles, Hong Kong business people have changed their attitude from one of apprehension to guarded enthusiasm, and begun exploring the opportunities the Shanghai project may provide.
The Shanghai FTZ is now seen by the Hong Kong business community as complimentary rather than competitive in servicing the diverse needs of the mainland as the new round of economic reforms begins to gather pace in coming months and years. Hong Kong can work with the Shanghai FTZ to achieve specific objectives without having to become part of it. It can also do so with the proposed Guangdong version of the Shanghai FTZ.
As it is, free trade in Hong Kong is already well established, it services not only the mainland but also the entire region and beyond. It is also a well-established renminbi offshore center. The total renminbi deposits in Hong Kong amount to about 900 billion yuan ($147 billion) and are growing fast.
More importantly, banks in Hong Kong are constantly exploring ways to utilize that large pool of renminbi funds to finance corporate expansion and infrastructure projects on the mainland. The Hong Kong offshore renminbi market has become an increasingly important source of longer-term funding to many mainland enterprises because of its market-oriented and reliable pricing mechanism.
For that reason, the immediate challenge to Hong Kong's position as the premier offshore renminbi market is coming from the other established financial centers, including London and Singapore, rather than Shanghai or Shenzhen. It is understandable why Guangdong wants to tap Hong Kong's advantages. But if the FTZ conceived by the Guangdong authorities is based on the market-oriented model of the Shanghai version, it should be designed to stand on its own rather than trying to incorporate Hong Kong into its fold.
