Qianhai: A Favourable Location in China for the Financial Sector

Qianhai is located in the city of Shenzhen just across the border of Hong Kong. China intends to use Qianhai as a testing ground to open up the financial sector and turn Qianhai into the Manhattan of southern China.

As a pioneer zone to promote cooperation between China and Hong Kong, the State Council approved the establishment of Qianhai in Shenzhen under the Overall Development Plan on SZ-HK Cooperation on Modern Service Industries in the Qianhai Area (“the Plan”) in August 2010.

Further to the approval of the Plan, the State Council officially released Guohan [2012] No. 58 (“the Notice”), setting out the tax incentives and preferential policies granted to enterprises established in Qianhai, and Provisional Measures of the Administration for Cross-Border RMB Loan in Qianhai, providing detailed guidelines of RMB lending from Hong Kong-based banks, on 27 June 2012 and 27 December 2012 respectively. Under the Notice, Qianhai is positioned as a designated economic development zone to facilitate further development of the modern service sectors in Shenzhen. To encourage development and the introduction of innovative financial products and services in Qianhai, the following preferential policies are offered:

Allowance of Cross-border RMB Lending and RMB Bond Issuances – To further promote the internationalization of RMB and explore widened channels for offshore RMB flow back, enterprises set up in Qianhai with operations or investments there can borrow RMB from a Hong Kong-based bank and settle the loan through banks in Shenzhen. Such lending arrangements are subject to the quota set by the People’s Bank of China (“PBOC”). Enterprises are required to file records and apply with the Shenzhen Branch of the PBOC.

With a view to facilitating the development of offshore RMB business in Hong Kong, financial institutions in Qianhai are allowed to offer RMB loans to overseas projects.

Qualified enterprises and financial institutions registered in Qianhai are permitted to issue RMB bonds in Hong Kong, subject to the limit approved by the State Council. By doing so, enterprises will be able to enjoy the lower fundraising cost in Hong Kong while overseas and Hong Kong investors have another channel to invest their RMB funds.

Supporting Fund and Equity Investment – The State Council encourages the establishment of equity investment funds in Qianhai, especially fund of funds. Enterprises are also encouraged to develop foreign-invested equity investment funds in Qianhai and explore new ways for foreign exchange settlement of capital funds, investment and fund management.

Relaxation of entry requirements for Hong Kong-based financial institutions – The entry requirements for Hong Kong-based financial institutions to establish subsidiaries/branches and carry on financial business in Qianhai are lowered so as to further open up the financial market in Qianhai.

Encouraging Innovation in the Financial Industry – As a designated economic development zone, it is encouraged to set up different types of financial institutions, develop new trading platforms and reform the financial system and business operation model in Qianhai.

Promoting Establishment of Regional Headquarters – Hong Kong and other overseas financial institutions are encouraged to set up regional or international management and business headquarters in Qianhai with a view to increase the level of globalization of financial industry in China.

Tax Incentives Offered – The following tax incentives are granted to financial institutions established in Qianhai:

Corporate Income Tax (“CIT”): qualifying enterprises are eligible to enjoy a reduced CIT rate of 15% (the normal CIT rate is 25%) on their taxable profits.

Individual Income Tax (“IIT”): qualifying personnel are eligible to apply for IIT subsidy from the Shenzhen Municipal People’s Government (“the Government”) to cover their additional tax burden from working in Shenzhen.

On 24 December 2012, the Government further announced that qualified personnel are entitled to IIT subsidy on IIT paid in excess of 15% of the taxable salaries and wages. Enterprises can benefit from this subsidy by saving the potential cost of tax equalization offered to their employees.

Latest Developments – In March 2013, China’s National Development and Reform Commission published the Catalogue for the Permitted Industries in Qianhai, the Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (“Catalogue”). According to the Catalogue, industry sectors from financial services, modern logistics services, information services, technology services, professional services and public services are allowed to enter into Qianhai. It is worth noting that most of these allowed sectors are also included in the 12th-Five Year Development Plan as the key modern services industries for development.

The preferential policies granted to enterprises in Qianhai are clearly beneficial to overseas and Hong Kong-based financial institutions. The registration and approval of enterprises in Qianhai has already started. Some enterprises have already entered into Qianhai and started operation on a trial basis. In order to enjoy the first mover advantage and benefit from the preferential policies and tax incentives, enterprises are encouraged to revisit their investment and business development plan and consider whether they can benefit from expanding their business to Qianhai.