MercoPress. South Atlantic News Agency

China prepares the ground for the Yuan to gradually become a reserve currency

Qianhai in Shenzhen will be encouraged to sell Yuan-denominated bonds

China will make part of the booming Shenzhen economic zone, a test ground for freer Yuan usage and capital account convertibility, the National Development and Reform Commission said on Friday.

Companies in Qianhai, Shenzhen will be encouraged to sell Yuan-denominated bonds in Hong Kong and to experiment with cross-border loans in the Chinese currency, Zhang Xiaoqiang, the vice chairman of the national planner, said at a press conference.

Qianhai is a 15-square kilometer special zone on the west side of Shenzhen, Guangdong province, which officials are seeking to develop into a financial service hub. The world’s second- biggest economy widened the Yuan trading band for the first time since 2007 in April, a move that may mark an early stage of a capital account opening.

Chinese officials told European Union business executives that the Yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino said last September.

There are 21 companies registered and 170 projects ready to start in the special zone, Xu Qin, mayor of Shenzhen, said on Friday. The government aims for 150 billion Yuan (23.6 billion dollars) worth of GDP by 2020 in Qianhai, NDRC said.

The area, expected to host financial and services companies, was created by China’s State Council in 2010 and has laws that model Hong Kong-style administrative structures.

“Qianhai should pioneer capital account convertibility” Zhang said, without giving details. The government also wants to encourage companies to set up headquarters, and investment funds to establish operations in Qianhai, he said.

The government will ease entry rules for Hong Kong companies, and offer 15% corporate income tax to some firms, encouraging the city’s services sector to operate in Qianhai, Zhang said.

“Companies could kick start their operations in Qianhai with funding from Dim Sum bond sales,” said Kelvin Lau, an economist at Standard Chartered Plc. in Hong Kong. The measures will also help give Hong Kong companies “the first-mover advantage.”

Hong Kong was designated as China’s major offshore Yuan trading hub in the nation’s latest five-year plan. The city has 552 billion Yuan of deposits in the currency in April, the largest outside China.

Hong Kong signed on Friday a supplementary agreement for closer ties. China will study lowering the requirement for Hong Kong financial institutions to apply for qualified foreign institutional investor status.

In related news the Yuan suffered its biggest quarterly decline since a dollar peg ended in 2005 as Europe’s crisis hurt demand for Chinese exports, slowing expansion.

The People’s Bank of China lowered the currency’s daily reference rate by 0.48% this quarter, while the Dollar Index strengthened 4% as investors favored safer assets. Slowing trade to the U.S. and Europe has “impacted” the Yuan, Zhang Jianhua, director-general of the People’s Bank of China’s research bureau, said at a forum in Shanghai this week.

“China’s economic data is unlikely to be impressive with lingering problems in Europe,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong. “The government is trying to bolster domestic consumption but that takes time. The Yuan will only rebound in the fourth quarter if the economy regains strong growth momentum.”

The Yuan weakened 0.88% this quarter to 6.3541 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency gained 0.05% Friday as Europe’s leaders agreed to ease repayment conditions for loans to Spanish banks.