China Power

Xinhua: China Approves 12 More Free Trade Zones

China’s central government has reportedly approved 12 new free trade zones, including ones in Tianjin and Guangdong.

Xinhua, China’s state run news agency, reported Wednesday that China’s central government has approved 12 additional free trade zones (FTZs), after the initial zone opened in Shanghai in late September last year. Citing “a source with knowledge of the approval,” Xinhua said that two of the new zones will be located in the city of Tianjin and in Guangdong Province. The locations of the other 10 free trade zones remains under wraps, although the article listed 11 potential sites — eight provinces (Zhejiang, Shandong, Liaoning, Henan, Fujian, Sichuan, Guangxi and Yunnan) and three cities (Suzhou, Wuxi, and Hefei) — that have publicly expressed an interest in setting up FTZs.

Back in November, I wrote on Guangdong’s proposal to become China’s next free trade zone. While every new FTZ is significant as a sign of potential economic opening, Guangdong’s proposal was especially noteworthy. As it was originally conceived, the FTZ in Guangdong would not only encompass the province’s cities of Shenzhen, Zhuhai, and Guangzhou, but would extend to link with Hong Kong and Macau. Both the latter two special administrative regions (SARs) have their own unique economic systems. A free trade zone that combines these SARs with mainland Chinese cities could have potentially revolutionary effects on trade within the region — depending, of course, on how strict the FTZ regulations wind up being.

Some outside observers have been disappointed with the Shanghai Free Trade Zone thus far. The Shanghai zone works according to a “negative list,” meaning the government releases a list of economic areas that are restricted or entirely off-limits to foreign investment. Anything not on the list is fair game. However, the length of the initial “negative list” was dismaying. Still, Shanghai’s party chief Han Zheng told Caixin in an interview late last year that the number of items on the list could be trimmed “gradually in 2014, 2015, or 2016.”

In fact, Xinhua reports that the Shanghai Free Trade Zone will roll out new measures in March of this year. According to Dai Haibo, the deputy director of the Shanghai FTZ’s administrative committee, the new steps will correspond with recent guidelines issued by the People’s Bank of China. These guidelines called for liberalizing interest rates, loosening control on “cross-border use” of China’s currency, and allowing individuals within the FTZ greater freedom to invest in foreign securities. These moves indicate an emphasis on financial reform, which has all along been the focus of Shanghai’s FTZ.

One critique of the Shanghai FTZ program has been that it is too narrow to truly alter China’s financial market. David Dollar, a senior fellow with the Brookings Institution, told The Diplomat in an interview that many of the reforms China needs “are inherently national-level reforms, like liberalizing interest rates or introducing more flexibility in the currency.” He did, however, express optimism that these reforms could spread beyond Shanghai, something which now seems poised to happen.

Now that a dozen new FTZs have been approved, it seems more and more likely that reforms in Shanghai and other FTZs could eventually become national policy. Considering the rumors that Li Keqiang had to fight an intense political battle to open the initial FTZ in Shanghai, the approval of so many new zones so quickly hints that Li and Xi have consolidated their control over the economic reform process. Central control over reform was aided greatly by Xi Jinping himself taking over the leadership role of the new leading group for overall reform, which held its first meeting Wednesday. Xi lending his personal authority to economic reforms may help silence opposition and speed up the process.

Still, don’t expect the rumored 12 new FTZs to be operational any time soon. Xinhua noted that getting the nod from China’s central government is only one step in the process. After approval is given, central government departments will conduct a survey of the potential FTZs. Once the survey is completed, each zone must create a specific establishment plan.  Xinhua’s source said the full process could take over a year, which fits with Han Zheng’s description of the process Shanghai went through. In Shanghai’s case, the initial government approval came in mid-2012, and the zone was officially launched in September 2013. Tianjin and Guangdong are the only candidates to have completed the survey already, meaning they could potentially open FTZs sooner.