UPDATE 3-China plans zone as test bed for service-sector reform
* New zone to pioneer cross-border yuan transactions
* Zone seen ring-fenced, to foster professional services
* Located near Hong Kong, to help territory expand
* Hong Kong to get new opportunities in telecoms, services
* China seeks to reignite growth as factories lose steam
By James Pomfret and Alison Leung
HONG KONG, June 29 (Reuters) - China said on Friday it will experiment with service sector reforms in a new business zone offering freer currency movements and Hong Kong professional standards, building the sort of test bed that turned the country into a manufacturing powerhouse.
Rural reform in the 1980s boosted farm productivity and special economic zones were the foundation of China's rise to become the 'factory of the world' and its second-biggest economy that is reshaping the global order.
Senior Chinese officials outlined plans for a $45 billion economic zone in Shenzhen, about an hour by car from Hong Kong, laying the base for future economic growth and to boost the country's ambitions to become a global financial leader as its factories lose steam.
The Qianhai project will be developed over the next eight years on reclaimed land in western Shenzhen, currently occupied by a smattering of warehouses, serving as an experimental zone for cross-border yuan transactions as part of Beijing's ambitions to eventually allow full convertibility of the closely managed currency.
"The country's policy is to gradually open up its capital account and realise the full convertibility of the yuan," said Zhang Xiaoqiang, vice chairman of China's National Development and Reform Commission, the state planning agency.
"Qianhai, as the first experimental zone of the country's modern service industry, should be a pioneer of that," he told a news conference.
The project was announced as Hong Kong marks the 15th anniversary of its return to China. President Hu Jintao is in Hong Kong this weekend to oversee the swearing in of a new chief executive.
Analysts said the experimental zone would be seen as a gift to help the territory expand with new business opportunities, investment options for offshore yuan piling up in its banks, and fresh outlets for expansion beyond the congested territory.
China has promised to support joint venture operations by Hong Kong and Macau telecommunications firms in Qianhai and will let Hong Kong investors build hospitals and schools there. It will also let Hong Kong-licensed lawyers and accountants practise in the zone.
WHERE REFORM BEGAN
Shenzhen was the location of the country's first special economic zone in 1980 where reforms were tested and later rolled out across the country.
The Qianhai plan enlists Shenzhen to help drive a new wave of reform and growth.
Beijing has repeatedly said it plans to rebalance the economy towards domestic activity and away from exports, a reliance that sideswiped the country during the global financial crisis when world trade ground to a halt.
Premier Wen Jiabao cut China's economic growth target this year to 7.5 percent to give some leeway to allow for reforms in the economy. It had been set at 8 percent for the previous eight years.
The latest slowdown in world growth is adding urgency to the case for change. China's factory sector shrank in June for the eighth consecutive month according to a preliminary manufacturing survey by HSBC.
China hopes the yuan will one day attain global status similar to the dollar, and aims to turn Shanghai into a financial hub on a par with New York and London by 2020.
"In general, it's a big policy move and tells the market that Qianhai will be the most open area in terms of China's capital account liberalisation," said Raymond Yeung, senior economist with ANZ in Hong Kong.
"Of course, the extent of liberalisation will depend on detailed rules such as whether it demands approvals from the Chinese central bank."
Friday's announcement only provided outlines of the Qianhai project.
For those trying to gauge its prospects, the devil will be in the details, including which mainland firms will be allowed to locate there, h ow freely funds will be allowed to flow into and out of the zone and what restrictions might be placed on transactions with Hong Kong.
Most analysts expect that China will move cautiously, as it has throughout its long march of financial reform.
As a test bed, any bold reforms will initially be confined strictly within Qianhai's 15 square kilometres - an area about a quarter of the size of Manhattan.
"It is like an arm of Hong Kong extending into China," said Kelvin Lau, regional senior economist for Standard Chartered in Hong Kong.
"They will know from day one if it is working, once they set down the boundaries and wall it. When they see loopholes, they will close them. The ring fencing is multifold."
Construction at Qianhai will likely begin next year.
Planned infrastructure would cost 285 billion yuan ($44.8 billion), local media estimated, not including a high-speed rail line that Shenzhen authorities are hoping to build to link Qianhai with central Hong Kong in a 30 minute journey.
Qianhai promises to be an exclusive locale with preferential corporate tax rates of just 15 percent and Hong Kong-standard services. Government researchers have said the bar will be set high for mainland companies that want to operate there.
Friday's news capped a week of announcements on cooperation between the mainland and Hong Kong, whose wealth and expertise China hopes to tap in its drive to reform and establish itself as a gl o bal financial power.
Hong Kong's securities regulator announced on Friday that China had approved mutual listings of exchange-traded funds on Hong Kong and mainland exchanges. The day before, the Hong Kong and Chinese stock exchanges announced they were forming a joint venture to develop cross-border products and services.
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