China to test new currency zone in Shenzhen

China plans to carve out a new special currency zone in Shenzhen to experiment with broader currency convertibility between Hong Kong and the mainland, Financial Times reported. Hong Kong banks will be allowed to loan renminbi directly to companies in the zone, called Qianhai Bay, thereby creating a new channel for renminbi held overseas to flow back into China. China began allowing its companies to settle most of their international trade in renminbi two years ago, creating a conduit for currency to flow abroad. However, foreign institutions have so far been given a limited array of investment options for their renminbi holdings, such as Hong Kong’s dim sum bonds. Beijing has pledged to slowly dismantle its tight capital controls, but it remains wary of inflows and outflows of speculative capital, which destabilized many Asian countries during the 1997 financial crisis.