Peking shifts policy gears on Hong Kong-area zones

Peking appears to be retreating quickly from one of its most controversial fiscal reform measures -- an independent currency for the Shenzhen special economic zone, which borders Hong Kong. The currency was proposed earlier this year to stem the zone's rampant black market in foreign exchange. It would also have marked a major step in Shenzhen's economic independence.

Now, however, the idea has been all but discarded, in part reflecting growing disagreements in Peking as to the future of China's four special economic zones (SEZ).

Conservative communists argue that the zones should function strictly as export-processing areas and magnets for foreign investment. These officials criticize Shenzhen and the other zones for corruption and for acting as conduits for importing Western consumer goods into China. Chinese leader Deng Xiaoping has stressed that they are an experiment from which China may eventually retreat.

Shenzhen, the fastest growing of the zones, has had particular problems because of its proximity to Hong Kong. The black market for freely convertible currencies -- such as the Hong Kong and United States dollars -- has mushroomed along with the zone's appetite for imports from just across its border.

``The Hong Kong dollar is the preferred currency in southern China -- especially in the SEZs,'' a Western diplomat here says.

Both Hong Kong and US dollars trade on any Shenzhen street corner for roughly twice their official exchange rates with the Chinese currency, the renminbi. The Chinese unit, which cannot be converted into foreign exchange, is fixed at a rate of 2.8 to the US dollar.

Shenzhen's special currency was proposed partly to clean up the local black market and partly as a matter of national pride -- the popularity of the Hong Kong dollar has annoyed Chinese officials.

Although it would have been issued by the People's Bank of China, the central bank, the currency would apparently have been managed by the bank's Shenzhen branch. It was to have been pegged to a basket of currencies and circulate only within the zone.

The currency's introduction was to coincide with completion of a new fence along Shenzhen's northern frontier -- a move underscoring the zone's increasing economic integration with Hong Kong.

The currency might also have added another tier to Shenzhen's already complex currency market. In addition to illegal trade in US and Hong Kong dollars, there is also a street market for foreign-exchange certificates, which are issued in China for use by foreigners.

Analysts here believe the proposal was also generating jealousy among officials in the other zones and in the 14 coastal cities China opened to foreign investment last year. These sources suggest the decision to drop the proposal was also helped by Peking's current efforts to control the country's foreign-exchange outflow.