By Saikat Chatterjee and James Pomfret
HONG KONG (Reuters) - The launch of a Shanghai free trade zone heralds a new chapter in China's drive to promote the yuan currency but it is unlikely to pose a competitive threat to Hong Kong any time soon and could instead provide more opportunities in the former British colony.
Underpinned by its strong rule of law and freedoms under the "one country, two systems" formula since it was handed over to China 16 years ago, Hong Kong is a long-time beneficiary of preferential economic policies.
It is China's designated global offshore yuan centre and is seen as a gateway to the world's second-largest economy.
While the launch of the 29 sq km Shanghai zone has stoked debate from tycoons to taxi drivers as to whether this could be a turning point for the fortunes of the former British territory, market watchers expect little impact for now.
"Shanghai's rise means that the international trading pie in the yuan only gets bigger and Hong Kong's share will grow in absolute terms," said Robert Minikin, a strategist at Standard Chartered Bank in Hong Kong.
Officials at the launch of the zone on Sunday promised a far more open and streamlined environment for foreign firms to do business in China, along with the relaxation of policies for a raft of service sectors, including banking.
However, the absence of senior Beijing leaders at the launch and few specifics on bolder reforms such as a more convertible yuan and liberalised interest rates left some disappointed, while officials stressed the zone remains a work in progress.
"This is the first time (for many policies in the zone)," Dai Haibo, the deputy head of the zone's administrative committee, said at the launch. "We are like primary school students."
Officials also suggested that more far-reaching reforms would take time, with some market watchers pointing to a closed-door party plenum in China in November as a likely platform for more policies to be announced by Beijing.
Dai, when asked why the zone would not offer low corporate tax rates of 15 percent similar to Hong Kong as originally speculated, suggested authorities wanted to bolster the confidence of foreign investors by easing restrictions through systemic changes, rather than dangling carrots.
While some officials in Hong Kong and the southern Chinese economic powerhouse of Guangdong have privately expressed concern about the Shanghai initiative, the public message has been one of symbiosis and collaboration.
"We feel there will be no negative impact on Hong Kong," the Commerce Ministry's international trade department director, Yin Zonghua, said in Shanghai on Sunday. "Hong Kong has its own advantages that can be utilised within the free trade zone ... It will promote Hong Kong's prosperity and stability."
Hong Kong leader Leung Chun-ying also shrugged off any potential threat, saying one of the most important factors for the former British colony's success was its strong rule of law.
The move in Shanghai dovetails with an announcement by China's State Council, or cabinet, in May to develop a roadmap to open up its hitherto closed capital account by 2020.
VALUE FOR MONEY
Since being granted the right to launch yuan-denominated banking and settlement services in 2004, Hong Kong's offshore yuan market has boomed, with more than 16 percent of China's trade now denominated in renminbi. An overwhelming majority of it passes through the city of more than seven million people.
Yuan deposits in Hong Kong banks comprise about 10 percent of the city's banking system and renminbi trading volumes have overtaken the local dollar, according to latest statistics from the Bank of International Settlements.
Shanghai's initiative, however, will force Hong Kong to look more closely at the competitiveness of its massive financial services sector as costs soar and its business from China slows, as well as the pricing of its financial services.
"We don't mind being expensive, but we have to provide value for money," said Nicholas Kwan, research director for Hong Kong's Trade Development Council.
As investors await further insight into what other incentives may be offered in Shanghai, three proposed similar zones in southern China - Qianhai, Hengqin and Nansha - are betting their proximity to Hong Kong will help stave off any threat posed by the mainland Chinese hub.
Qianhai, a coastal suburb of Guangdong province which surrounds Hong Kong, has so far struggled to take off, remaining a dusty wasteland some three years after it was first touted as a new "mini-Hong Kong".
Hengqin island, near the gambling hub of Macau, is the most developed of the three, while the Nansha zone is still in the preliminary stages of development.
A source who recently met with senior Guangdong leaders said they were now lobbying Beijing to allow the province its own free trade zone, or to allow Qianhai the same latitude for foreign investment.
"Qianhai has Hong Kong, but Shanghai doesn't ... Hong Kong is widely known for playing an important role in China's history of development," said Wang Jinxia, director of the research and innovation centre and a spokesman for the Qianhai Authority.
"The free trade zone in Shanghai won't be finished by 2020, but here we have Hong Kong already."
(Additional reporting by Yi-Mou Lee and Michelle Chen; Editing by Anne Marie Roantree and Raju Gopalakrishnan)
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