China has opened the Shanghai Pilot Free Trade Zone today, the first free trade zone (FTZ) on the mainland. State-run news outlet Global Times reports that the FTZ will be “an important step in China’s economic reform and the internationalization of the yuan.”
Details as to exactly what will be allowed remain somewhat murky, but the Financial Times reports a surge in interest in both houses neighboring the 28 square-kilometer zone, which is located in Shanghai’s Pudong district, and in stocks of companies expected to benefit.
Initially believed to entail primarily a reduction of tariffs, the FTZ recently appears to have been positioned as a symbol of China’s commitment to economic reform. Now, according to plans issued on Friday by China’s State Council, it will be a test ground for financial liberalization. Specifically, interest rates in the zone will be market driven, and firms will have greater freedom in converting yuan and shifting money offshore. Foreign companies will “gradually” be able to participate in a commodities future exchange.
The Wall Street Journal says that Citigroup has received approval from Chinese authorities to set up a branch in the FTZ, making it the first foreign bank to part in the new development. Other banks have expressed interest in following suit. Meanwhile, a number of foreign hedge funds are apparently set to be allowed to raise money from domestic Chinese institutions.
It appears now that the Chinese government is using the FTZ in Shanghai as a test-bed for tricky reforms, in much the same way that Deng Xiaoping used Shenzhen in 1980 to experiment with capitalism. Those reforms are seen as marking the start of China’s extraordinary economic rise over the past three decades. Apart from the financial sector deregulation, the reforms being trialed in Pudong include a “negative list” approach to foreign investment, which would mean that outside certain prohibited sectors, foreign companies would get the same treatment as domestic firms.
The FTZ may also be the first tentative step in making Shanghai a global financial hub, competing with the likes of Singapore and Hong Kong. This is closely linked to China’s plans to make the renminbi one of the major currencies in international financial markets.
One reform that apparently won’t be taking place in the FTZ is unfettered internet access. Last week, the South China Morning Post was reporting that Internet users in the zone would get special treatment, and be able to access sites like Facebook and YouTube that have been blocked in China. As noted in The Diplomat, this would have come at a time when China has been cracking down on domestic social media sites like Weibo. The SCMP report was followed by a similar article in Reuters, which quoted a senior Chinese official as suggesting that internet access would be unblocked both in Shanghai and in another economic zone in Shenzen.
Since then, however, both Xinhua and the Global Times have rebuffed the claims, saying that Internet users within the FTZ will get no special privileges. The Wall Street Journal suggests, however, that the unblocking may proceed, but over a period of years.
Despite the confusion over internet access – and indeed over exactly what the Shanghai FTZ will entail – the new development does seem to have the potential to be a significant milestone in China’s economic development. The government of President Xi Jinping has made it clear that China cannot continue to rely on its investment-driven growth, and that reforms are needed. Shanghai may well be the starting point, particularly in services and in the nation’s capital account.
James Pach is Editor of The Diplomat.