A Financial Center Is Envisioned on a Muddy Tract in Southern China

There isn’t much to see in Qianhai today except for a tract of muddy, mostly undeveloped land that has been reclaimed from the sea in the southern Chinese city of Shenzhen, near the border with Hong Kong.

A gleaming meeting hall built by the local government to host potential investors sits largely marooned, surrounded by dusty plots of new land that run for miles in every direction. The steady clang of passing dump trucks fills the air.

Six years from now, officials here envision, Qianhai will be a thriving, international finance district in Shenzhen that will stand shoulder to shoulder with Wall Street, the City of London or Hong Kong’s Central District. The local government anticipates a working population of 650,000 people generating annual gross domestic product of around $25 billion in Qianhai by 2020 â€" plans that call for total investment of nearly 400 billion renminbi, or about $65 billion.

But Wall Street and its counterparts didn’t become global financial centers by way of government fiat. For China, the challenge is fundamental; gently easing the state’s grip on the financial system after decades of heavy-handed control. It’s a bold blueprint, but, so far, not much more than that.

Qianhai is one of more than 10 newly created or proposed special zones, including the better-known Shanghai free trade zone, where China plans to experiment with a new wave of financial overhauls.

The changes, first outlined in November by President Xi Jinping, serve as a recognition of the dangerous imbalances created by the investment-led growth model that has powered China since the financial crisis. Policy makers want to deflate these risks by reining in the nation’s reliance on cheap debt, modernizing the state-controlled financial system and refocusing the economy on domestic consumption.

One crucial component of this strategy is to ease government currency controls, allowing a freer flow of Chinese money into foreign stock, bond and property markets and granting overseas investors more access to domestic markets. Here, Qianhai hopes to play a major role.

It is a risky proposition. Many nations have been thrown into financial turmoil after moving too quickly to loosen currency controls and open their financial markets.

Some analysts say China’s leaders have little choice. They argue that continuing to rely on credit-fueled investment for growth will only delay China’s day of economic reckoning, raising the risk of even bigger problems down the road.

“Opening the capital account and pushing ahead with overall financial market reform is absolutely crucial for sustaining higher growth rates than the rest of the world,” said Diana Choyleva, the head of macroeconomic research at Lombard Street Research in London. “If they don’t go down the route of reform now, and they get cold feet and go back to just throwing money at the economy to get growth, we are going to have a whopping big financial crisis within a couple of years.”

Analysts have described Mr. Xi’s proposals as the biggest changes to the country’s financial landscape in decades. Officials in Qianhai are fond of pointing out that Mr. Xi’s first trip outside Beijing after taking over as head of the Communist Party in late 2012 was to Shenzhen and Qianhai, where he spoke of national rejuvenation and the pursuit of what he has called the “Chinese dream.”

“The goal of Qianhai is to be a dream factory for the Chinese dream,” said He Zijun, deputy director of the Qianhai Authority, which administers the zone.

Mr. Xi’s southern tour was symbolic. Many Chinese instantly recognized it as a tribute to a famed 1992 trip to Shenzhen by Deng Xiaoping, the paramount leader who in 1978 began China’s transformation into an economic powerhouse. Deng loosened the state’s grip on the economy, using Shenzhen as a petri dish for experiments in freewheeling capitalism.

“For the past 30 years Shenzhen has led the reform and opening up process in China,” Mr. He said. “In the future we hope that Qianhai can continue to be a test ground for further reform and opening up, and we can set an example for all other regions.”

Things are off to a modest start. Beijing gave the green light for Qianhai’s unique status in 2010. Since then, local officials have auctioned several blocks of land. Several banks, including Standard Chartered and Hong Kong’s Hang Seng Bank, have opened small branch offices in the district.

Few foreign investors have made major investments in Qianhai so far. But players like Silverstein Properties, the developer of the new towers at the World Trade Center site in New York, are starting to take note.

In January, Silverstein teamed up with a Chinese firm in a winning bid of 13.4 billion renminbi for a plot of land in the district â€" a record for the city of Shenzhen. The developer acquired rights to a 550,000-square-foot site, where it plans to build offices, retail outlets, service apartments and hotels covering a total floor area of nearly five million square feet, more than twice the floor area of the Empire State Building.

“Thanks to its policies, location, transportation access and world-class architecture, I believe that Qianhai will become one of the most successful business districts in the world,” Marty Burger, the chief executive of Silverstein, said in a statement last month.

In an effort to attract the foreign investors needed to fill all those offices, Qianhai officials frequently promote the district’s 15 percent corporate tax rate â€" compared with the 25 percent national rate and 16.5 percent in nearby Hong Kong. But details of how to qualify for tax breaks have yet to be released by the country’s Ministry of Finance, which is concerned about the effect it might have on other Chinese cities, according to Peter Kung, a senior partner responsible for southern China at KPMG.

In Shanghai’s free trade zone, which was officially opened in September, officials have promised a sweeping relaxation of China’s current restrictions on financial activity. In December, the central bank, the People’s Bank of China, issued a 30-point proposal that included floating interest rates and allowing foreign involvement in areas including currency and futures trading and domestic bond sales.

But again, the details, have yet to be announced. Shanghai officials have published a lengthy list of activities and industries that are off-limits in the zone â€" with the implication that if something is not banned, it is allowed. The so-called negative list closely mirrors China’s current restrictions on foreign investment. For example, within the zone, foreign ownership is capped at 49 percent for brokerages and 50 percent for car factories â€" the same as anywhere else in China.

There also appears to be little consensus in China about how companies within these special zones will trade or interact with companies or customers in the rest of the country, or whether they will be permitted to do so at all.

“Whilst they’ll be useful petri dishes for experimenting on open capital accounts and everything else, I think they’ll be pretty limited in terms of how they can operate because you still have to ring-fence the special economic zone,” said Matthew Sutherland, the senior investment director for equities in Asia at Fidelity Worldwide Investment.

Some see bureaucratic infighting as the most likely culprit behind China’s delay. The proposals involve areas covered by at least 10 different Chinese government ministries and regulatory agencies.

“You have different regulators and they all have their vested interests,” said Joseph W. K. Chan, a partner at the law firm Sidley Austin in Shanghai. “The vast majority of them do not see eye to eye; there are turf wars going on all the time.”

Mr. Chan said, however, that recent pronouncements by Shanghai officials suggest that “a lot of the back-room horse trading has already taken place.”

Robert Kung, the China country head at Bank of New York Mellon, said, “The magnitude of this liberalization, this opening up, really depends on how comfortable the government and the regulators feel.”