Blue Ocean

China is sampling some of Hong Kong’s secret sauce. The Qianhai financial zone, just over the border from the special administrative region (SAR), is to be the site of a new $45 billion experiment in currency conversion. Perhaps more significantly, it will incorporate Hong Kong’s legal practise into China. This shows influence between the SAR and Beijing doesn’t just go one way.

Qianhai, which literally means ‘front sea’ in Chinese, is part of Shenzhen, China’s first experimental ‘special economic zone’. Shenzhen is trying to transform from an export base for electronics and clothing to a services centre. The plan is for its GDP to hit $24 billion in 2020 — not bad for what’s now a barren stretch of reclaimed land the size of London’s Heathrow airport.

It’s an important financial experiment for the country. Companies in the area should be able to freely transfer funds across the border, although probably at first within quotas, as with Hong Kong’s early moves into yuan conversion scheme. It won’t be quick, partly because China won’t want to unleash a flood of capital. Besides, Qianhai first has to build physical infrastructure before it can hit the financial highway.

The most significant part is that Qianhai will incorporate the rule of law that is the foundation of a modern services-based economy. The plan is for Qianhai to design its own set of laws, with elements borrowed from Hong Kong’s legal system, such as arbitration courts with juries including residents from across the border.

That will be key if China’s future is to be in the services trade. China’s services exports grew on average 18 per cent a year from 2005 to 2010, faster than the 16 per cent annual increase of merchandise exports, according to the World Trade Organisation. But for that to continue, fair enforcement of contracts is key, especially when it comes to provision of logistics and shipping. If Qianhai is a success, the model could be replicated elsewhere in China. That would be a valuable gift from Hong Kong to the mainland.