From Capital Economics today:
- The free trade zone about to be set up in Shanghai is intended as a testing ground for new policies, with a focus on liberalising the service sector, and financial services in particular. Successful innovations will ultimately be rolled out nationwide, but probably only after many years. As such, this is an experiment worth watching but not the game-changer some believe.
- The imminent establishment of a free trade zone (FTZ) covering 29km2 of eastern Shanghai is being greeted as an important step forward in China’s economic liberalisation. The details of how the FTZ will operate remain sketchy and will probably remain so even after the zone’s formal opening later this month, but comments in official media have revealed at least the broad outlines of what to expect.
- The new zone will amalgamate four existing bonded trade areas in Shanghai that are already home to many trading companies. The key new development will be wide-ranging liberalisation of the zone’s service sector, including opening it up to foreign firms. This liberalisation of services marks a key difference with the Special Economic Zones (SEZs) set up in the 1980s, which targeted manufacturing.
- Three sets of reforms have been proposed. First, the lifting of controls on investment in service sectors in the FTZ, including healthcare, insurance, logistics and other business services. Across China, these sectors remain dominated by state-owned firms and are largely protected from foreign competition.
- The second set of reforms covers financial services. According to local media reports, capital controls will be eased for firms in the zone (allowing renminbi convertibility and access to global financial markets), restrictions on bank interest rates will be removed, and both domestic and foreign banks will be allowed to offer a broader range of financial services.
- Finally, the government’s role in administering the FTZ will be curtailed. For example, all forms of investment will be allowed unless explicitly prohibited on a “negative list”. This would be far less restrictive than the usual practice of limiting investment to areas that have explicitly been permitted.
- With other cities vying to set up FTZs of their own, the presumption is that successful innovations from Shanghai will then be adopted by FTZs elsewhere, and subsequently rolled out across the country.
- This process has the potential to transform China by opening up large parts of the economy to competition and reducing the role of the state. But there are stumbling blocks that are likely to prevent as rapid a transformation as some early commentary has suggested.