HK investors eye opportunities in Shanghai FTZ
Instead of seeing the China (Shanghai) Pilot Free Trade Zone as a threat, some leading Hong Kong businessmen are beginning to explore the opportunities the experiment offers.
At a conference organized by DBS Bank Ltd on Friday in Hong Kong, a group of bankers, investment experts and law and accounting professionals expressed their views on how the zone will evolve and tried to identify what it will bring to Hong Kong.
Their focus, naturally, was on the financial sector. The blueprint for financial development in the FTZ, announced earlier this week, was widely considered to be bolder than expected. But the details are still too sketchy to provide a firm basis for assessment, the experts said.
Nevertheless, they agreed that the initial stages of development would likely be centered on outbound investment, which they said would have less impact on the domestic economy. As such, Hong Kong and some other financial centers would be well-positioned to offer their services.
“The success of the Shanghai free trade zone is in the best interest of Hong Kong,” said Patrick Cheung, a partner at Deloitte China. “Since 1997, Hong Kong has always been in a position to assist the development of the mainland and the city’s prosperity depends on that.”
“At an early stage, there might be more opportunities for domestic capital to invest overseas instead of foreign funds entering the mainland market,” Cheung said.
He added that even though interest rate liberalization is the zone’s major task, there are too many stakeholders and regulators involved. Thus, headwinds against reform will likely be strong, he noted.
“But outbound investment is an easier sector for most of the parties to reach consensus,” Cheung said. “If a business is focused on assisting China’s outbound investment, it might see less barriers to develop in the zone. After all, the zone was set up to benefit the country’s real economy.”
And the number of registered companies in the zone reflects that trend, said Joseph Chan, partner of Sidley Austin, a law firm based in Shanghai, adding that so far about 1,400 domestic firms have set up shop in the zone, compared with only 38 foreign companies.
“It’s obvious that currently the major business in the zone is outbound investment,” Chan said.
“It’s very encouraging to see the latest PBOC’s policy to endorse outbound investment in the zone,” Chan said. “In the near future, the window for the renminbi to go abroad will open wider. It’s widely believed that within three months to a year, there will be further detailed instructions to interpret the policy.”
On Monday and Wednesday, the People’s Bank of China — the country’s central bank — published documents on financial reform related to the Shanghai FTZ. The regulator encouraged outbound investment and said it will allow companies to issue bonds in overseas markets. It will also allow residents and non-residents in the zone to open accounts and invest in foreign securities markets.
“As mainland capital is being invested outside, Hong Kong companies have a greater chance of supporting those overseas activities. Hong Kong has all kinds of middlemen such as financial consultants, lawyers and investment banks, which can help to find the right targets for mergers and acquisitions and see through the process smoothly,” said Chan.
“From 2002 to 2010, Chinese enterprises’ overseas acquisitions focused on strategic resources such as oil companies and mines. But in the past three years, the wind has changed,” said Chan. “M&A deals in the high-tech sector are developing very fast. The further loosening of controls for domestic outbound investors in the free trade zone will increase the footprint of Chinese companies around the world.”
However, Chinese investors face significant resistance globally since the country has yet to sign the latest bilateral investment treaty with the US, said Sung Yun-wing, co-director of the Shanghai-HK Development Institute and professor of economics at the Chinese University of Hong Kong.
Sung added that at the current stage, foreign investments on the mainland have to be approved case by case, which means the authorities have the right to reject investors.
Sung expressed hopes that the so- called “negative list” used in the Shanghai FTZ, a list released by authorities that blocks or restricts foreign investment in some sectors, will be shortened in coming years.
“Though now the ‘negative list’ nearly echoes the regulations on the mainland, we are looking forward to a shorter list in 2014 and the years beyond.”
Businessmen consult the procedures of company registration in China (Shanghai) Pilot Free Trade Zone at the service hall of the trade zone on Oct 25.