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The Central Government has given Shanghai the green light to set up the mainland’s first free trade zone， moving it closer to becoming a global financial， trade and shipping hub to rival other Asian cities such as Hong Kong. The pilot free trade zone will serve as a new growth engine amid an economic slowdown and sluggish foreign trade. The most valued function of the zone is serving as a testing ground for China to roll out major financial reforms as experience gained from the pilot zone will be copied to other regions of the country. Questions remain as to whether Shanghai might challenge Hong Kong’s status as an offshore yuan trading center after the establishment of the zone. Experts also warn of possible risks the pilot zone may face in the future.
The State Council has approved the establishment of a pilot free trade zone in east China’s Shanghai， according to a Ministry of Commerce（MOFCOM） statement on August 22. The project， covering an area of 28.78 square km， will be built on the basis of Shanghai’s existing bonded zones—Waigaoqiao Free Trade Zone， Waigaoqiao Free Trade Logistics Park， Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone—and will take more than 10 years to complete.
A free trade zone is a place where goods can be imported， manufactured and exported without the intervention of customs authorities. Upon completion， the Shanghai Free Trade Zone will provide， officials say， worldclass transport and communications facilities and a tax-free environment for domestic and foreign enterprises as a major hub of their supply chains in Asia.
A general plan governing the operation of the free trade zone has yet to be released. Lawmakers need to approve amendments to existing laws to legalize certain experiments in the zone， read the MOFCOM statement.
The pilot zone is a crucial move in adapting to global economic and trade development and imposing a more proactive opening-up strategy， said the statement， adding it will help explore a new path for China’s opening up and promote the country’s economic restructuring as it seeks new modes of growth. The zone will help foster China’s global competitiveness and serve as a new platform for its cooperation with other countries， and help build an upgraded economy.
Significance
“China’s decision to set up a free trade zone in Shanghai comes at a time when the country is facing great challenges from home and abroad，” said Chen Bo， an economic and trade expert with the Shanghai University of Finance and Economics. China’s foreign trade only increased 6.2 percent in 2012， the slowest since 2008， hinting what could be a long-term slow growth period. The country needs a new engine to invigorate a slowing economy amid domestic and foreign challenges， he said.
Ye Tan， a renowned financial commentator， agreed. “The policy dividend of WTO entry has been somewhat used up. China needs a new system to release more dividends and a free trade zone makes the most sense， because it would not only facilitate exports， but also attract foreign investment，” she said.
Experts say the pilot free trade zone is of particular significance to China’s industrial restructuring， which calls for the modernization of its supply chain management with an emphasis on logistics.
Under the background of globalization， the Shanghai free trade zone will not only lift foreign trade， but also intensify the inflow of production factors to support China’s future development in the next 30 years， say analysts.
Shen Guilong， a professor of economics at the Shanghai Academy of Social Sciences， said the zone is a breakthrough for Shanghai’s rapid economic development. Shen says the zone will attract more global companies， especially from the service sector， to launch their AsiaPacific offices or China headquarters in the city. The zone is expected to offer more complete， convenient and transparent foreign trade services， including customs clearance and su- pervision policies， he adds.
Liu Shengjun， Deputy Director of CEIBS Lujiazui International Finance Research Center， hailed the free trade zone as an historic breakthrough since China’s WTO entry in 2001. “China completed the first phase of globalization by joining the WTO and will launch the second phase by setting up the Shanghai free trade zone， which is designed to reduce trade barriers and expand opening up.”
The Central Government has targeted Shanghai as a global financial， trade， shipping and logistics center， so it’s no surprise the free trade zone will be situated there. Shanghai， a city of over 20 million people， is already the world’s largest container port city and a major transportation hub in China and the region.
The Shanghai Municipal Government is working to take full advantage of an opportunity it cannot afford to miss. Construction of the free trade zone will be top of the city government’s work agenda for the rest of this year. The government in August issued a 42-clause regulation to support the free trade zone by encouraging more innovation in the financial sector and giving small and micro-businesses better access to credit.
Measures to support the Shanghai free trade zone are to be given top priority， Shanghai Mayor Yang Xiong said on July 25 as he delivered his half-year government work report at the Expo Center.
Shanghai’s GDP expanded 7.7 percent from a year earlier to 1.02 trillion yuan （$164.5 billion） in the first half of 2013， according to the Shanghai Statistics Bureau.
Surpassing Hong Kong？
“The most valuable part of the free trade zone would be more innovation and loosening of controls in the financial sector，” said Chen Wenxing， a financial commentator. “For example， foreign capital may be allowed to establish banks in the zone； Chinese banks may be allowed to conduct offshore yuan trading； fullconvertibility of the yuan， the Chinese currency， may be allowed on some conditions.”
Mei Xinyu， a research fellow at the Chinese Academy of International Trade and Economic Cooperation， said offshore financial businesses have the biggest potential in the zone. “It can help the globalization of the Chinese currency.”
Analysts say loosening of those controls could strengthen the financial system and make it more efficient. The question then is： Will Shanghai pose a threat to Hong Kong’s status as a global financial hub？
Hong Kong is a well-established loan syndication center servicing the funding needs of governments and corporations in the region and around the world. It also shares with Singapore the region’s fund management and private banking businesses.
Liu Yuanchun， a professor from Beijingbased Renmin University of China， said Shanghai may change the course of the mainland’s yuan internationalization by luring business from Hong Kong， currently the country’s major yuan offshore trading center. “It’s possible that as Shanghai’s free trade zone plan proceeds， Hong Kong’s status as the region’s financial center might be weakened， but when that day may come is uncertain.”
Billy Mak， an associate professor of finance at Hong Kong Baptist University， said the zone would definitely deal a blow to Hong Kong’s off- shore yuan business if it creates more business in yuan trade financing.
However， Feng Zhengzhou， President of the Shanghai Export Enterprise Association， is less optimistic. “I don’t think the Shanghai free trade zone will be any threat to Hong Kong， especially in the short run. The zone is like a fetus， not yet independent of the mother country， while Hong Kong has become a very mature free trade port over many years.”
Wang Guowen， the Supply Chain Management Association’s Chief Representative in China， agreed with Feng， adding that the Shanghai free trade zone， with only 28.78 square km， is more of an experimental spot for China to study how the country should further reform and open up to the world.
MOFCOM spokesperson Shen Danyang also said at a press conference that the free trade zone is aimed at accumulating experiences for China’s further reform and opening up.
“It’s totally unnecessary to worry about its negative impact on Hong Kong.”
Guarding against risks
Central authorities should remain highly alert to financial risks in the free trade zone， experts warn.
“The Shanghai free trade zone may conduct some experiments on interest rate liberalization. As a matter of fact， many South Asian countries have tried market-oriented interest rates， but ended up with hefty debts and asset bubbles due to a lack of experience and weak economic power. Even developed countries face many challenges with liberalized interest rates，” said Ye.
She also advised the Central Government to take a more cautious approach when it comes to yuan convertibility on the capital account.
“Hefty inflows of foreign capital will create asset bubbles and pressure for the appreciation of the yuan. Therefore， trade， service， technology and logistics companies in the zone should get more freedom in yuan convertibility.”
“If China starts yuan convertibility on capital account recklessly， more-than-expected foreign capital may flow to China’s housing market， further pushing up already runaway home prices in Shanghai，” she said.
The State Council has approved the establishment of a pilot free trade zone in east China’s Shanghai， according to a Ministry of Commerce（MOFCOM） statement on August 22. The project， covering an area of 28.78 square km， will be built on the basis of Shanghai’s existing bonded zones—Waigaoqiao Free Trade Zone， Waigaoqiao Free Trade Logistics Park， Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone—and will take more than 10 years to complete.
A free trade zone is a place where goods can be imported， manufactured and exported without the intervention of customs authorities. Upon completion， the Shanghai Free Trade Zone will provide， officials say， worldclass transport and communications facilities and a tax-free environment for domestic and foreign enterprises as a major hub of their supply chains in Asia.
A general plan governing the operation of the free trade zone has yet to be released. Lawmakers need to approve amendments to existing laws to legalize certain experiments in the zone， read the MOFCOM statement.
The pilot zone is a crucial move in adapting to global economic and trade development and imposing a more proactive opening-up strategy， said the statement， adding it will help explore a new path for China’s opening up and promote the country’s economic restructuring as it seeks new modes of growth. The zone will help foster China’s global competitiveness and serve as a new platform for its cooperation with other countries， and help build an upgraded economy.
Significance
“China’s decision to set up a free trade zone in Shanghai comes at a time when the country is facing great challenges from home and abroad，” said Chen Bo， an economic and trade expert with the Shanghai University of Finance and Economics. China’s foreign trade only increased 6.2 percent in 2012， the slowest since 2008， hinting what could be a long-term slow growth period. The country needs a new engine to invigorate a slowing economy amid domestic and foreign challenges， he said.
Ye Tan， a renowned financial commentator， agreed. “The policy dividend of WTO entry has been somewhat used up. China needs a new system to release more dividends and a free trade zone makes the most sense， because it would not only facilitate exports， but also attract foreign investment，” she said.
Experts say the pilot free trade zone is of particular significance to China’s industrial restructuring， which calls for the modernization of its supply chain management with an emphasis on logistics.
Under the background of globalization， the Shanghai free trade zone will not only lift foreign trade， but also intensify the inflow of production factors to support China’s future development in the next 30 years， say analysts.
Shen Guilong， a professor of economics at the Shanghai Academy of Social Sciences， said the zone is a breakthrough for Shanghai’s rapid economic development. Shen says the zone will attract more global companies， especially from the service sector， to launch their AsiaPacific offices or China headquarters in the city. The zone is expected to offer more complete， convenient and transparent foreign trade services， including customs clearance and su- pervision policies， he adds.
Liu Shengjun， Deputy Director of CEIBS Lujiazui International Finance Research Center， hailed the free trade zone as an historic breakthrough since China’s WTO entry in 2001. “China completed the first phase of globalization by joining the WTO and will launch the second phase by setting up the Shanghai free trade zone， which is designed to reduce trade barriers and expand opening up.”
The Central Government has targeted Shanghai as a global financial， trade， shipping and logistics center， so it’s no surprise the free trade zone will be situated there. Shanghai， a city of over 20 million people， is already the world’s largest container port city and a major transportation hub in China and the region.
The Shanghai Municipal Government is working to take full advantage of an opportunity it cannot afford to miss. Construction of the free trade zone will be top of the city government’s work agenda for the rest of this year. The government in August issued a 42-clause regulation to support the free trade zone by encouraging more innovation in the financial sector and giving small and micro-businesses better access to credit.
Measures to support the Shanghai free trade zone are to be given top priority， Shanghai Mayor Yang Xiong said on July 25 as he delivered his half-year government work report at the Expo Center.
Shanghai’s GDP expanded 7.7 percent from a year earlier to 1.02 trillion yuan （$164.5 billion） in the first half of 2013， according to the Shanghai Statistics Bureau.
Surpassing Hong Kong？
“The most valuable part of the free trade zone would be more innovation and loosening of controls in the financial sector，” said Chen Wenxing， a financial commentator. “For example， foreign capital may be allowed to establish banks in the zone； Chinese banks may be allowed to conduct offshore yuan trading； fullconvertibility of the yuan， the Chinese currency， may be allowed on some conditions.”
Mei Xinyu， a research fellow at the Chinese Academy of International Trade and Economic Cooperation， said offshore financial businesses have the biggest potential in the zone. “It can help the globalization of the Chinese currency.”
Analysts say loosening of those controls could strengthen the financial system and make it more efficient. The question then is： Will Shanghai pose a threat to Hong Kong’s status as a global financial hub？
Hong Kong is a well-established loan syndication center servicing the funding needs of governments and corporations in the region and around the world. It also shares with Singapore the region’s fund management and private banking businesses.
Liu Yuanchun， a professor from Beijingbased Renmin University of China， said Shanghai may change the course of the mainland’s yuan internationalization by luring business from Hong Kong， currently the country’s major yuan offshore trading center. “It’s possible that as Shanghai’s free trade zone plan proceeds， Hong Kong’s status as the region’s financial center might be weakened， but when that day may come is uncertain.”
Billy Mak， an associate professor of finance at Hong Kong Baptist University， said the zone would definitely deal a blow to Hong Kong’s off- shore yuan business if it creates more business in yuan trade financing.
However， Feng Zhengzhou， President of the Shanghai Export Enterprise Association， is less optimistic. “I don’t think the Shanghai free trade zone will be any threat to Hong Kong， especially in the short run. The zone is like a fetus， not yet independent of the mother country， while Hong Kong has become a very mature free trade port over many years.”
Wang Guowen， the Supply Chain Management Association’s Chief Representative in China， agreed with Feng， adding that the Shanghai free trade zone， with only 28.78 square km， is more of an experimental spot for China to study how the country should further reform and open up to the world.
MOFCOM spokesperson Shen Danyang also said at a press conference that the free trade zone is aimed at accumulating experiences for China’s further reform and opening up.
“It’s totally unnecessary to worry about its negative impact on Hong Kong.”
Guarding against risks
Central authorities should remain highly alert to financial risks in the free trade zone， experts warn.
“The Shanghai free trade zone may conduct some experiments on interest rate liberalization. As a matter of fact， many South Asian countries have tried market-oriented interest rates， but ended up with hefty debts and asset bubbles due to a lack of experience and weak economic power. Even developed countries face many challenges with liberalized interest rates，” said Ye.
She also advised the Central Government to take a more cautious approach when it comes to yuan convertibility on the capital account.
“Hefty inflows of foreign capital will create asset bubbles and pressure for the appreciation of the yuan. Therefore， trade， service， technology and logistics companies in the zone should get more freedom in yuan convertibility.”
“If China starts yuan convertibility on capital account recklessly， more-than-expected foreign capital may flow to China’s housing market， further pushing up already runaway home prices in Shanghai，” she said.