The renminbi revolution is gathering pace. A ceremony in the southern Chinese city of Shenzhen this month marked the formal beginning of a challenging new phase of a process that is already changing China's financial sector in subtle and important ways.
A group of 15 banks signed an agreement to offer loans to Shenzhen's new Qianhai enterprise zone, opening the door for offshore participation in China's domestic lending market for the first time since 1949.
Monday's signing comes after last week's long-awaited announcement that the People's Bank of China (PBoC) has signed a renminbi clearing agreement with Taiwan, further expanding the currency's global footprint.
The Pearl River Delta, just over the border from Hong Kong, has long been the test bed for Chinese economic reform. Experiments which started in Shenzhen, ranging from the Mainland's first Special Economic Zone in 1979 to renminbi trade settlement in 2009, have formed the foundations of China's transformation.
Qianhai presents a series of challenges and opportunities to banks on both sides of the border
Qianhai, formally known as the Qianhai Shenzhen-Hong Kong Modern Service Industries Cooperation Zone, is physically and economically a relatively small experiment: the development is just 15km² and media reports have indicated that inbound loans are likely to be limited to a total of RMB50 billion, but its impact is likely to be profound. The local authorities describe it as "a useful exploration for China to create a new opening up layout with a more open economic system".
Not only will Hong Kong banks be allowed to extend commercial renminbi loans to Qianhai-based onshore Mainland entities, but the PBoC has also indicated that such loans will for the first time not be subject to the benchmark rates set by the central bank for all other loans in the rest of China.
The Shenzhen authorities are predicting that Qianhai will generate GDP of RMB150 billion by 2020, helped by the loosening of the capital account restrictions.
When it is fully developed, Qianhai will form a bridge where the Mainland can try new accounting and legal measures, and a protected environment where international service industries can learn more about doing business in China.
In financial terms, Qianhai presents a series of challenges and opportunities to banks on both sides of the border. HSBC believes that fears that the project will drain Hong Kong of RMB liquidity are misplaced.
We believe that the Qianhai experiment will help boost both the RMB loan business and cross-border RMB liquidity. The cost of RMB loans in Hong Kong, currently between 4 and 5 per cent, is typically 100-200 basis points cheaper than on the Mainland.
Qianhai offers a valuable hold in the Mainland markets for Hong Kong banks, and the latest measure reflects the true sense of "act first, try first". This new measure on cross-border lending will enhance the co-operation between Hong Kong and Shenzhen, the co-operation between Hong Kong and Guangdong, and accelerate cross-border convergence.
Qianhai represents significant progress in China's three-step programme towards full convertibility of the renminbi. The redback is fast becoming a significant trade currency. The ongoing relaxation of capital controls, represented by Qianhai and the Renminbi Qualified Foreign Institutional Investor programme, signal that it is well on its way to becoming a global investment currency.
The renminbi as global reserve currency is still some way off, but Qianhai is another clear indication that Beijing is not intimidated by the challenges of reforming the financial sector to achieve its aim.