Shanghai Free Trade Zone - bold experiment or control mechanism?

The FTZ in Shanghai’s Pudong district is a 29-square-kilometre expanse of docks, hangars and warehouses. Some 36 companies are already licenced to operate there and 11 financial institutions, including some of the biggest banks, have also set up branches there. 

The FTZ’s blueprint talks about the zone’s ability to provide, within a controlled-risk environment, conditions that, among other things, will test the yuan’s convertibility and its cross-border use, and set interest rates according to the market. Some tout the zone as the catalyst for the next phase of China’s development after the first one was launched more than three decades ago.

Analysts say the zone has been created to test out China’s reform roadmap for the coming decade. If the experiment works, its measures could be introduced nationwide.

Certainly, China’s leaders have been calling for economic upgrades and market-oriented reforms since taking office in March. Comprehensive reform packages are expected to be discussed at the Third Plenary Session of the 18th  CPC Central Committee in November, and the FTZ is likely to feature. 

Hong Kong is also paying attention, which is perfectly understandable given the territory’s financial rivalry with Shanghai. Asia’s richest man, Hong Kong tycoon Li Ka-shing, says the zone would be a major factor in accelerating Shanghai’s development as a rival to its southern neighbour. 

Hong Kong has long promoted itself as a gateway to the mainland, but it is now facing challenges such as high labour and rental costs, and it is becoming increasingly clear that China cannot continue to rely on just one hub. However, not everyone is getting excited about the FTZ. Some are sceptical that the zone will amount to much, saying it is an experiment in how little reform China’s leaders can get away with – not how much. The absence of senior leaders at the opening ceremony also raised doubts about the prospects for the zone.

As a Wall Street Journal commentator pointed out, since 1978 Beijing has opened many such zones in various municipalities. Early on those zones served a useful purpose, encouraging foreign direct investment, and some of the reforms they pioneered were rolled out more widely.

But for the most part the zones have been used by the government to geographically fence in its economic liberalisation and to maintain control.

Further details of the FTZ are still emerging, with some reports citing the removal of restrictions on the interest rates banks pay on deposits; a fully convertible currency, greater competition, including foreign investment, in telecommunications; and a reduction in the censorship of communications.

It will take some time before we can judge the zone’s merits. But with China at a major crossroads in its development, there will certainly be a strong focus on how this super-sized laboratory experiment performs.

 

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