[Desperate,times]Desperate times call

　　Senior Chinese officials announced a slew of reforms on June 29 targeting a special development zone in Shenzhen, harkening back to the measures Deng Xiaoping took to open the southern city to the outside world more than 30 years ago.
　　The new measures have put the 15-square-kilometer Qianhai Bay development zone at the forefront of plans to open the country’s capital account to foreign investment. Regulators will allow Hong Kong banks to make yuandenominated loans directly into the zone, while mainland banks in the zone will be able to lend renminbi directly to overseas firms. (Elsewhere, approval is required on a transaction-by-transaction basis.) The US$45 billion plan for the zone also includes preferential tax rates and other measures to encourage growth in the financial services industry.
　　
　　Defining gradualism
　　Analysts lauded the direct cross-border loans as a significant step on China’s journey toward full convertibility of the yuan into other currencies. That process began in 2009 when Beijing first allowed trade debts to be settled in renminbi and continued with gradual measures to allow that offshore renminbi to be reinvested in the mainland.
　　The plans for reform in Qianhai Bay are clearly part of a push to expand crossborder investment. On June 20, China’s banking regulator drastically reduced its requirements for foreign institutional investors to invest in mainland markets. Firms now only need US$500 million to apply for the Qualified Foreign Institutional Investor (QFII) program, down from US$5 billion. Once approved, those institutions can now own up to 30% stake in a single mainland stock, up from 20%, and can also invest in the interbank bond market.
　　The effect these reforms will have on domestic markets is likely to remain unclear until they are implemented, which may not happen until next year. Beijing could restrict which banks are allowed to operate in the development zone to soften the impact of reforms. Details on how Hong Kong banks would lend into the zone also have yet to be released.
　　Another question is whether institutions will rush to apply for the QFII program based on the looser restrictions. QFII quotas totaling only US$27.4 million have been given out under the program as of June, far less than the US$80 billion cap.
　　The high volatility and mediocre year-to-date returns of Chinese markets could fail to entice investors. In mid-July, the Shanghai Composite Index hit its lowest level since early 2009. The outlook is also gloomy: Average profit margins for non-financial Chinese companies are expected to fall to 4% this year from 5% in 2011, according to Bank of America, likely dragging on share prices.
　　Beijing may have chosen now to push through reforms in an attempt to prop up markets and levels of investment. Such a seeming act of anxiety could be another signal – like the faster-than-expected cuts to the benchmark interest rates in June and July – that Beijing knows the economy is worse off than it lets on.
　　China’s central bank said last year that it hopes to achieve full convertibility by 2015. But progress toward that goal has been slow, and many analysts are skeptical that China’s financial system will be ready by then. China’s slowing economy appears to be forcing the government’s hand into more rapidly opening the capital account. If poor market conditions are what it takes to speed economic reforms, a dose of fear may be exactly what Beijing needs.
　　Newsroundup
　　Economics
　　China’s GDP grew by 7.6% in the second quarter, down from 8.1% in the first quarter and the slowest pace in nearly three years. Consumer prices rose just 2.2% in June from a year earlier, the slowest pace in more than two years, while the producer price index fell 2.1%. Imports grew by 6.3% year-on-year in June and exports rose by 11.3%, both slower than in May. In response to the gloomy economic news, China’s central bank cut interest rates on July 5 for the second time in a month. The New York Times caused a stir when it suggested that local officials had cajoled power companies into falsifying data in a bid to disguise flagging growth.
　　Consumer
　　Beijing cut retail fuel prices for the third consecutive month in line with slumping global oil prices. Sportswear retailer Li Ning said it would replace its current CEO with founder Li Ning and another executive. US private equity firm Carlyle Group acquired a controlling stake in China’s Mandarin Hotel Holdings, allowing the fund to compete in the Chinese mid-tier hotel market.
　　Property
　　Residential property prices rose an average of 0.1% in June from May levels, the first increase in 10 months, according property website SouFun Holdings. Speculation mounted that local governments were quietly easing property restrictions to bolster the economy. However, Premier Wen Jiabao pledged to maintain home buying restrictions, and Beijing forced local officials in Henan who publicly attempted to ease mortgage lending restrictions into a quick retreat.
　　Banking and Finance
　　Chinese banks extended US$144.3 billion of new loans in June, up 16% from May. Regulators took steps to ease crossborder investment, such as introducing new rules to facilitate yuan flow between the mainland and Hong Kong and reducing requirements for foreign funds to invest in China. Officials announced plans to create a new special currency zone in Shenzhen where renminbi would be freely convertible.
　　Trade
　　Chinese trade officials warned European counterparts they would launch probes of EU companies unless regulators halted an investigation into Chinese telecoms companies Huawei and ZTE. The Obama administration launched a WTO challenge of Chinese tariffs on US auto imports. Separately, the WTO ruled that China’s UnionPay credit card monopoly contravened its rules.
　　Politics & society
　　Chinese President Hu Jintao traveled to Hong Kong in early July to mark the 15th anniversary of the territory’s handover and oversee the swearing-in of a new chief executive. A planned heavy-metals processing plant in Sichuan province triggered large protests on environmental grounds that eventually led to the factory being cancelled. Government researchers urged policymakers to relax China’s one-child rule to combat the effects of an aging population, shortly after a forced abortion in Shaanxi province led to an uproar online. Censors targeted financial news agency Bloomberg’s China website after the organization detailed the wealth, estimated at over US$300 million, of president-in-waiting Xi Jinping’s extended family.
　　International relations
　　China’s maritime disputes flared again when Japan announced that it would consider purchasing some of the Senkaku/Diaoyu Islands claimed by China, with Japan temporarily recalling its ambassador from Beijing. Separately, a Chinese oil company said it would auction off exploration rights to areas of the South China Sea claimed by Vietnam, prompting demonstrations in Hanoi. A military spokesman said China had created a “combatready” patrol system for areas of the disputed sea. A meeting of the Association of Southeast Asian Nations failed to reach a consensus on how to deal with China’s actions in the region.