The creation of a test zone for freer Rmb transactions in the Chinese city of Qianhai could have long-term implications on trade finance in the region, industry experts tell GTR.

The Chinese government announced at the end of June that it would experiment with freer currency movements between Qianhai and Hong Kong, with the long-term prospect of opening up the country’s capital account. However, clear rules have yet to be set, and implementation of the new system is not expected before 2020.

Standard Chartered’s head of production management, east, transaction banking, Michael Vrontamitis, explains that if successful, the test could be rolled out to the rest of the country, bringing significant changes to the trade finance environment, but warns that it will take some time for that to happen.

“Relative to the size of cross-border Renminbi trade that happens between China and Hongk Kong, the Qianhai project is not going to be huge. The Chinese authorities as part of it are looking to leverage their liquidity offshore to repatriate Rmb into China to develop the region, and to lower barriers for financial institutions to set up in Qianhai. They want to support Qianhai-registered banks to be able to provide Rmb financing for offshore projects, which I think is an interesting development.

“That’s one element that’s going to be required in the longer term for capital account liberalisation – a free flow of money cross-border, but it’s not the only one. Will that help Rmb trade financing? I’m sure it will have some impact, but given the size of Qianhai, I would look at it as a test You’ll have a few transactions to start with, and it may build up over time,” he tells GTR.

He adds that even if China authorises funding of onshore projects from offshore financiers, it will keep it on a low scale with strict regulations. “Based on the past experiences, my sense is that at least initially it will be restricted, with rules around who can do it, in what amount they can do it, and there will likely be a quota system around it. Obviously if they extended this and didn’t have quotas it would have a major impact, but I don’t think that will be the short-term outlook. It’s more about testing the mechanics of how the system might work, rather than the absolute amounts flowing through the system.”

DLA Piper Hong Kong associate James Willcock looks at the way China’s current account was gradually liberalised to facilitate cross-border Rmb transactions, and expects the same to happen with the capital account.

“China seems to be using the unique set-up in Hong Kong as a testing ground for the internationalisation of the Rmb, whether via the relaxation of rules concerning the current account or now with Qianhai on the capital account. Although the time frame is at the moment unclear, we probably would expect the programme to be rolled out beyond Qianhai, depending on the success of Qianhai after that’s been implemented,” he says.

However, Vrontamitis believes that if China wants to liberalise its capital account in the medium term, it will have to use other tools than Qianhai. He adds: “If you’re thinking that capital account liberalisation will happen in the 2020s then that will probably give Qianhai a lot of time to get up and running. If you’re more optimistic about capital account liberalisation and think that it might happen earlier than 2020, then the authorities in China will probably have to think of some other way to pilot some of the capital account liberalisation.”

Both Vrontamitis and Willcock warn that Qianhai will require a lot of infrastructure development before the city can be turned into a business centre, but they see the announcement as a crucial step in the internationalisation of the Rmb.

“The major blockage around invoicing in Rmb as opposed to US dollars is around education and understanding the benefits. The more these tests happen, the more it improves the knowledge around the Rmb and that’s actually vital in the longer term for corporates to be able to make a choice between invoicing in Rmb or US dollars,” concludes Vrontamitis.