The Dream Factory of China

　　Qianhai in the western part of Nanshan Peninsula of the Shenzhen Special Economic Zone with an area of 15 sq. kilometers is located at the geographic centre of the Pearl River Delta. The concept of Qianhai was conceived in as early as 2005/2006 in the context of a new economic development model for China. Despite China’s high rate of economic growth in the past 20 years, its economic structure remains underdeveloped with a relatively small modern service sector. In the government document, ‘The Reform and Development Planning Outline for the Pearl River Delta Area (2008 to 2020)’, Shenzhen was to become a forerunner, using Qianhai as a driver, in forging a closer relationship in modern service industry between Guangdong Province and Hong Kong. Against this background, the State Council approved in August 2010 ‘The Overall Development Plan of Qianhai-Hong Kong Modern Service Industry Cooperative Zone’ which chartered a roadmap for Qianhai’s development until 2020. Qianhai has since then been given a unique status in introducing industry and policy innovations under the guiding principles of internationalization, rule of law, and market economy. Qianhai is therefore a special zone within the Shenzhen Special Economic Zone, enjoying even more free market and rule of law privileges. This is in line with China’s development practice of picking pilots on an experimental basis for new policies and initiatives before implementation for the nation as a whole, as in the case of the establishment of the four special economic zones at the beginning of China’s economic modernization in the late 1970s. Since 2010, many policies for a favourable business environment have been introduced, some businesses such as cross-border RMB loans have gained substantial progress, land auction started in July 2013, the offices of many institutions and associations have been established, and infrastructure building has been on target for completion. Qianhai is given the mission to develop four modern service industries, viz financial services, modern logistics, information services, and professional and technical services. As at 30th September, over 16,000 enterprises have registered in Qianhai, about 60 percent of which are in financial services.

　　Despite the progress so far, Qianhai has to face a number of challenges in its development. First, being a special zone within the Shenzhen Special Economic Zone, Qianhai has a competition and cooperation relationship with Shenzhen. What would be the best way for Qianhai to growth hand in hand with Shenzhen itself? Second, a similar relationship exists between Qianhai and Hong Kong under the concept of Qianhai Shenzhen-Hong Kong modern service industry cooperative zone. How would it be possible for the two places to synergize each other while maintaining each other’s economic DNAs? Qianhai has to prove to Hong Kong that there are businesses which Hong Kong investors/businessmen cannot do in Hong Kong but can do or can do better in Qianhai. Qianhai has also to prove to mainland and overseas investors that there are businesses they cannot do or can only do with difficulties in Hong Kong and other places/zones in China but can do or do better through Qianhai. A question certainly in our mind is: how does Qianhai fare with the Shanghai Pilot Free Trade Zone? Fourth, while the policies introduced are certainly helpful in transforming Qianhai, how about their implementation? Changes in culture and mentality are necessary to really change the business environment. Would borrowing experience from Hong Kong and having the presence of Hong Kong and overseas enterprises be sufficient to ensure the transformation?

　　QIANHAI AS A HUB FOR THE 21ST CENTURY MARITIME SILK ROAD

　　In September 2013, President Xi when giving s speech in Kazakhstan presented for the first time the idea of an ‘Economic Belt of the Silk Road’ on the traditional route of the Silk Road from Xian, via Urumqi, Central Asia, and Turkey to Rotterdam. In October of the same year, President Xi made a proposal on the ‘21st Century Maritime Silk Road’ when addressing the Indonesian Parliament. This sea route is from Tianjin, coastal regions of East China, via Shenzhen to ASEAN countries, South Asia, Kenya, and finally to the southern part of Europe and Rotterdam. These two proposals constitute China’s 21st century international economic development strategy of ‘One Belt and One Road’.

　　The modern Maritime Silk Road is of strategic geo-political and geo-economic importance. It is evident that China wants to use the building up of the Road with significant Chinese presence to reduce China’s current reliance on European companies for freight transportation, to better monitor the sea lanes now patrolled by US fleets, and to promote China’s trade and outward direct investment in the countries along the Silk Road. An even more important underlying geo-political reason is probably China’s intention to counter-balance the US foreign policy of ‘return to Asia’ or ‘rebalancing towards Asia’ formally declared in 2012. The establishment of the Maritime Silk Road should also make it easier for reaching a more amicable agreement between China and ASEAN countries over the South China Seas issues. Against this background, China also proposed the establishment of an Asian Infrastructure Investment Bank (AIIB) in 2013 with now an initial capital of US$100 billion and China as a major shareholder. On 24 October 2014, an agreement for the establishment of AIIB was signed by 21 countries in Beijing. The purpose of AIIB is to form a financing platform for the development of the Maritime Silk Road. It was estimated by ADB that for 2012 to 2022, US$8 trillion was required for infrastructure building in ASEAN and neighbour countries. In the recently concluded APEC meeting in Beijing, President Xi further proposed the setting up of a ‘New Silk Road Fund’ with US$40 billion contributed by China, and a ‘Maritime Silk Road Bank’, managed by the private Maritime Silk Road Investment Management Fund with capital also from some ASEAN member countries. This is in line with China’s major agenda of promoting connectivity and building partnership in the Asia-Pacific region in the Beijing APEC meeting.

　　Qianhai, located strategically along the Maritime Silk Road and empowered by the Central Government with special polices to introduce innovative modern services and engage in a close cooperation with Hong Kong, should no doubt be in an excellent position to capitalize on the advantages brought about by the development of the Maritime Silk Road. Qianhai can become a centre of the financing platform. It is expected that infrastructure investment will not only come from the public sector, but more importantly from private funds. For example, Maritime Silk Road Investment Management Fund has said that the Fund will raise RMB100 billion in the near future to invest in related projects in the countries and regions along the Silk Road. Qianhai in partnership with Hong Kong is likely to be better than anywhere in China and along the Road in performing the financing platform function. The huge foreign exchange reserves of the Chinese government and the high corporate savings of Chinese private enterprises would constitute compelling reasons for finding cross-border direct investment opportunities. At the same time, Qianhai can also become a ‘transformer/rotator’ for technology, goods, human resources and professional services between China and other countries and regions on the Silk Road.

　　There are however a number of concerns in realizing Qianhai’s role in the development of the Maritime Silk Road. Unless Qianhai is moving fast enough on the right track, other regions/cities on the mainland will start to compete. There are already suggestions of setting up pilot special trade zones in many part of the mainland and the establishment of Maritime Silk Road banks by some local governments. Qianhai cannot depend forever on the special advantages given by the Central Government. What should Qianhai do to enable it to move fast and steadily in infrastructure construction and institutional capacity building and in attracting leading Hong Kong and overseas enterprises? Another issue is how the costs and benefits derived from the Silk Road development can be more equality distributed among the countries and regions concerned and among the relevant stakeholders. China is a driver of the project but of course should not over-influence it and take the lion’s share of benefits. China has to be mindful of the underlying economic, social and political issues. The development of Silk Road will bring about disruption to the people living in the areas concerned, inequalities in economic benefits, and geo-political sensitivities. In particular, the competition between the two superpowers for predominance in the region could undermine the economics of developing the Silk Road, which is largely non-controversial. The formation of TPP under US initiative versus RCEP under China-India dominance is already an economic cooperation issue underpinned by geo-politics. With President Xi’s strong advocating, the recent APEC meeting agreed to formally starting the FTAAP process with a roadmap. FTAAP is good in one sense because both the superpowers are included, but on the other hand the struggle between the superpowers will probably not stop but intensify. Furthermore, the establishment of AIIB under China’s dominance touches on the question of global governance. In the provision of development funds, the world is currently dominated by the World Bank largely under US influence and the ADB largely under Japanese influence. Now, the proposal for the forming of AIIB largely under Chinese influence can be considered as an effort to put in place a more even distribution of global governance responsibilities. But on the other hand, is China ready to take up such responsibilities in the global governance of financial matters? Are there economic and political justifications for the US, Australia, Japan and South Korea to opt out of AIIB? In what way and to what extent would the development of the Maritime Silk Road be undermined by all these geo-politics and geo-economics in the region?

　　TACKLING THE AFTERMATH OF GLOBAL FINANCIAL CRISIS

　　A mission of Qianhai is to become an international financial centre. The global and regional financial environment after the 2008 Global Financial Crisis (GFC) is an important factor affecting its development. The GFC originated in the US was mainly the result of rapid deregulation of financial markets on the one hand and excessive financial innovations on the other. Owing to the interdependence of the real and financial sectors in the global economy, the financial crisis in the US was quickly transmitted to other parts of the world in different forms. For Europe, the close connection of capital markets with the US resulted in the carryover of toxic assets from the US to Europe. European banks also suffered losses from their investment in the US and later from the withdrawal of liquidity of US financial institutions. For Asia, the major shock was the drop in exports resulting from the recession in the US and other developed countries leading to decrease in domestic demand as well. The more open the Asian economies, the greater the adverse impact was. The impact of the GFC on Asia was much greater than expected. In the fourth quarter of 2008, Asia economic growth (excluding China and India) went down by as much as 15%. The capital markets of Asia were also badly hit because of the much reduced inflow of portfolio capital from developed countries. The real sectors of Japan and some emerging economies were seriously hurt because of the breaking down of the global production chain when manufacturing in the US and Europe was in recession. While external shock was transmitted to domestic demand in China, its closed financial markets were not seriously affected, and exchange rates remained relatively stable because its capital account was not fully open. The GFC was possibly a blessing in disguise for China. The Crisis sped up China’s economic transformation from dependence largely on exports for growth to more domestic demand-driven, from investment-led to consumption-induced. The Crisis on the other hand made China more cautious in opening its capital account and in RMB liberalization and internationalization.

　　The GFC has raised serious issues of prudential financial sector regulation and supervision. The international financial community reacted fast by launching new measures of surveillance. G-20, established after the Asian Financial Crisis, was ‘upgraded’ to replace G-8 with a strong commitment to restoring international financial stability. Basle III emphasizing capital adequacy was put in place in 2010 with a time table of eight years for compliance to complete. Inasmuch as the so-called New International Financial Order proposed by developed countries after the Asian Financial Crisis in 1997-98 was never even on the drawing board, we have reasons to doubt the realization of a new international financial order this time. But, we should have more confidence this time because the whole world not only emerging Asian economies was infected and affected. Special attention this time has been put to address the risks of SIFI (systemically important financial institutions) so that large-scale crises could be avoided or at least minimized. But, compliance of financial institutions, especially those in the less advanced economies, with the new rules and regulations is not always possible and ensured. On the other hand, many experts are now asking the question: Is Basle III enough for macro-prudential policy? It would be important to evaluate the global financial outlook in terms of the above positive and negative factors.

　　Another related issue is how soon we can really get out of the Great Recession which was a sequel of the GFC. The US has been in recession or near-recession for 7 years since the last quarter of 2007. The US Federal Reserve has also launched a few rounds of quantitative easing without much success in lifting the economy out of the doldrums. Abenomics in the same vein has not proved to be working either. In Asia, economic recovery from the GFC was relatively rapid and positive economic growth has largely been maintained. But it is still not sure whether Asia is now on its path of long-term sustainable growth. In China, we are still debating about hard or soft landing and whether 7% growth is enough to absorb the rapid increase in labour force. It is legitimate to ask such questions as whether Asia in general and China in particular will continue to be the engine of global economic growth, and when the global economy will be back on track for an upswing of a business cycle.

　　REJUVENATING EUROPE VIA ECONOMIC AND FINANCIAL REFORMS

　　The financial crisis in the US was quickly spread to Europe because of the interlocking of capital markets and financial institutions of the two regions. The impact was severe because the eurozone economies had already its fundamental weaknesses such as real sector low growth and lack of competitiveness, high debt-GDP ratio, and transference of private debts to sovereign debts, etc. Europe soon went into recession after the GFC and the eurozone crisis has emerged since early 2009 with sovereign debt defaults in some countries like Portugal, Ireland, Greece and Spain and ten banks in Central and Eastern Europe asking for bailouts.

　　The ‘Troika’ consisting of the European Commission, the European Central Bank an IMF had to make concerted efforts to restore financial stability. Various financial stability mechanisms and facilities have been put in place, and substantial and substantive financial reforms are underway. Specifically, Europe has been working towards a more integrated, stable and efficient financial sector with proper supervision. From November 2014, the European Central Bank will take over the supervisory responsibilities of all the banks in the eurozone. The ultimate objective is to ensure that the financial sector supports the real sector and is growth-enhancing. With countries of such diversity in institutions, growth rates and economic structure, there must be significant difficulties in carrying out financial reforms across the region. What are the major difficulties?

　　Europe being the only part of the Maritime Silk Road which has well developed economies with sophisticated capital markets can naturally play a crucial role in the development of the Silk Road. Besides taking part in serving as a financing platform, Europe is an important source of technology, management know-how, and professional and technical human resources. Europe can also serve as a host for Asia’s increasing appetite for outward direct investment in general and for China in particular. The financial reforms and economic outlook of Europe are pertinent to Asia, China, and Qianhai.

　　While we are interested in the financial reforms, we are also concerned about economic recovery in Europe. We are concerned about the regaining of competitiveness, the restoration of fiscal discipline in some countries, the implementation of prudent macroeconomic policy, and the effectiveness of the conventional or unconventional monetary policy to promote growth. How optimistic can it be in forecasting European economic growth in the next five years even if we assume financial reforms are well underway? We are also concerned about the stability of the eurozone. What are the possibilities of a breaking down of the eurozone? To maintain the integrity of the zone are obviously difficult, given the fact that there is one single currency but with seventeen national central banks in additional to the European Central Bank, there is a currency union but no fiscal union (members have different tax and expenditure systems), and there is one currency for countries with vast difference in their levels of development. The disintegration of the eurozone is obviously of tremendous significance to Asia and the world. Furthermore, assuming the smooth sailing of European financial reforms and gradual recovery of the European economy, what specific role can Europe play in the development of the Maritime Silk Road in the short-run and long-term?

　　THE ASIAN WAY OF RESPONSE: COOPERATION AND COORDINATION

　　Financial markets are not so closely integrated with the US as in the case of Europe despite the fact that the balance sheets of banks and individuals were hurt because of their involvement in developed country assets. Also, the financial system in most Asia emerging economies had been overhauled after the Asian Financial Crisis, and prudent macro-economic policy was largely practiced. But economic growth was badly hit by the GFC because of significant decreases in exports and therefore domestic demand.

　　The Asian response to the GFC was generally an escalation in economic integration and cooperation. One might even argue that the GFC was a blessing in disguise for Asia, particularly for ASEAN which became more determined to achieve the ASEAN Economic Community (AEC) by 2015. Asia economic integration is for increasing intra-regional trade and investment and therefore improving the region’s efficiency and competitiveness in the global economy. In doing so, it is hoped that the region will be more insulated from global economic and financial crises.

　　After the 1997-98 financial crisis, Asia financial cooperation formally started in 2000 with the Chiang Mai Initiative (CMI) which was basically a currency swap arrangement. After the GFC, Asia made a further step to establish the Chiang Mai Initiative Multilateralisation (CMIM) in 2009/2010 and its ASEAN +3 Macroeconomic Research Office (AMRO) in 2011. CMIM has a mechanism like the European Financial Stability Fund (EFSF) but with a much smaller size of facility. The AMRO is for assessing global financial development and surveillance of the financial sector of Asia adopting a regional, peer review approach. There are other initiatives in financial cooperation such as the promotion of regional banks (Asia-based banks operating in other Asian economies), regular meetings of finance ministers and central bankers for consultation and cooperation, and macroeconomic policy coordination, particularly regional exchange rate policy cooperation, and maintenance of price stability and fiscal sustainability. In general, Asia aims at building a more self-contained financial structure through closer cooperation so that the region can depend less on outside financial intermediation and can be more insulated from developed countries when global crises occur.

　　There are still challenges to building a new Asian financial architecture. There is more work to be done in integrating the capital markets of emerging Asian economies. A regional bond market has yet to be fully developed. Despite all the efforts in financial cooperation in the region, we can still ask the question whether Asia has now enough safeguards to ring fence itself from external shocks and crises. Financial sector is for supporting the real sector to prosper. What is the prospect of economic growth in Asia in general and in ASEAN in particular in the coming five years? In the past, economic cooperation in Asia was hindered by willingness of the economies to pool resources but not sharing markets. Is this still true for Asia after the experience of two financial crises in the last two decades? How willing are ASEAN economies to participate in the Maritime Silk Road projects?

　　SUMMARY

　　Qianhai is poised for a new era of development in modern service industry in cooperation with Hong Kong. Serving as a pilot for innovative modern services, Qianhai is a contributing factor to China’s new economic development model. Playing a role in the 21st Century Maritime Silk Road, Qianhai will contribute to the development of Asia and Europe, and possibly to the building of a new international financial architecture and the burst of a new phase of global economic growth.

　　LIST OF ACRONYMS

　　ADB   Asian Development Bank

　　AEC   ASEAN Economic Community

　　AIIB  Asian Infrastructure Investment Bank

　　AMRO  ASEAN + 3 Macroeconomic Research Office

　　APEC  Asia Pacific Economic Cooperation

　　ASEAN Association of Southeast Asian Nations

　　CMI   Chiang Mai Initiative

　　CMIM  Chiang Mai Initiative Multilateralization

　　EFSF  European Financial Stabilization Fund

　　FTAAP Free Trade Area of the Asia-Pacific

　　GFC   Global Financial Crisis

　　IMF   International Monetary Fund

　　RCEP  Regional Comprehensive Economic Partnership

　　RMB   Renminbi

　　SIFI  Systemically Important Financial Institution

　　TPP   Trans Pacific Partnership

　　US    The United States of America