News Analysis: Shanghai’s Free Trade Zone

The Shanghai Free Trade Zone is an ambitious step forward despite initial disappointments, writes Willy Lam.


The Shanghai Free Trade Zone (SFTZ), which opened for business in late September, is a litmus test of whether the administration under President Xi Jinping and Premier Li Keqiang will speed up economic and financial reforms in their first five-year term. Most of the reactions from foreign – and even domestic – media have focused on the limited nature of the first slate of regulations for the zone, which comprises 29km2 of land in Shanghai’s Pudong district. Commentators were also disappointed that Premier Li – a keen proponent of FTZs not only in Shanghai but other regions – did not show up for the zone’s opening. Administrators of the SFTZ, whose official name is China (Shanghai) Pilot Free Trade Zone, indicated that in the first phase, selected domestic and foreign companies would be allowed to operate in six sectors – financial services, shipping, trade, professional services, culture and the public sector.

So far, however, only Citibank from the United States and Singapore’s DBS Bank have been given the green light to set up shop. There is also a “negative list,” a reference to 16 economic categories that are off limits to foreign investors. These range from culture and the media to hydropower and telecommunications. Banks and other companies based in the zone can issue bonds and raise capital in renminbi, the Chinese currency.


However details regarding the extent to which a full range of capital-account transactions will be liberalized have to be worked out. Moreover, a widely expected tax concession – a reduction of corporate income tax from the current minimum rate of 25 percent to 15 percent – has yet to materialize. Another hotly anticipated liberalization – that financial institutions within the zone will be allowed to freely set interest rates on bank deposits – is still being studied by the authorities. Chinese sources familiar with the decision-making process in the State Council – or central Government – however, have indicated that Premier Li has decided on a “low-profile and cautious start” so as not to antagonize holders of vested interests. The sources said several ministerial-level units as well as corporate stakeholders had expressed reservations about an early opening of the zone. These included the People’s Bank of China and the State Administration on Foreign Exchange, which did not favor the full liberalization of the renminbi as well as capital-account transactions in the near term.

Chinese banks and financial companies – most of which are controlled by the party and state apparatus – also fear that foreign financial institutions operating in the FTZ could easily soak up business from Chinese customers with promises of higher returns on their investment. It must be noted, however, that in view of uncertainties in the global market – including the possible tapering off of quantitative easing in the American economy – the authorities tend to err on the side of caution.

It was in March 2009 that then-premier Wen Jiabao announced that the central Government had given permission for Shanghai to become a financial center on par with the Hong Kong Special Administrative Region.

The Wen cabinet noted that by the year 2020, “Shanghai will become an international financial center that is commensurate with China’s economic strength and the internationalization of the renminbi.” In the past few years, Beijing has taken aggressive measures to boost the international circulation of the renminbi mainly through two means. Bilateral trade agreements have been signed with countries including Russia, Brazil and Japan to settle payments in each other’s currencies, and Australia, which commenced direct currency trading between the Australian dollar and the renminbi in April this year. Moreover, offshore RMB centers have been set up in Hong Kong, Singapore and London.

The renminbi is now the eighth most traded currency in the world with a 1.49 percent market share in August. The opening of the SFTZ signals that there is at least broad consensus among the party’s highest echelons that Shanghai – as well as other global business hubs such as Tianjin and the Pearl River Delta – has to make a move to convince foreign businessmen that Beijing is committed to eventual economic integration with the international marketplace.

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The SFTZ and other pilot areas for liberalized financial and commercial activities will be one of the major focuses of an economic-reform blueprint that will be endorsed by the Third Plenary Session of the party’s Central Committee slated for November. The blueprint, which will spell out the new leadership’s vision for what Premier Li calls “an upgraded version of market reform,” will give the clearest indication to date on the Xi-Li leadership’s willingness – and ability – to ring in the new by smashing the holders of vested interests.

*Willy Lam is an Adjunct Professor in the History Department and in the Master’s of International Political Economy Program at the Chinese University of Hong Kong, and is also a Select Professor of China Studies at Akita International University, Japan. Dr Lam is a regular contributor to a number of global media platforms including CNN, Foreign Policy, and the Wall Street Journal. Dr Lam specializes in areas relating to China’s economic and political reform as well as foreign policy and is currently writing a book on Chinese leader Xi Jinping.


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