Big reform plans for China's newest trade zone set high expectations

Fri Sep 27, 2013 3:27pm EDT
 
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By Pete Sweeney

SHANGHAI (Reuters) - China has formally announced detailed plans for a new free-trade zone (FTZ) in Shanghai, touted as the country's biggest potential economic reform since Deng Xiaoping used a similar zone in Shenzhen to pry open a closed economy to trade in 1978.

In an announcement on Friday from the State Council, or cabinet, China said it will open up its largely sheltered services sector to foreign competition in the zone and use it as a testbed for bold financial reforms, including a convertible yuan and liberalized interest rates. Economists consider both areas key levers for restructuring the world's second-largest economy and putting it on a more sustainable growth path.

No specific timeline was given for implementing any of the reforms, though these should be carried out within 2-3 years, it said, adding financial liberalization may depend on adequate risk controls. Chinese state media have cautioned that dramatic financial reforms are unlikely this year.

An executive at a foreign multinational in Shanghai said his firm was waiting for more clarity. "Is this Shenzen 2.0 heralding the beginning of a new era in trade, or a flash in the pan to simply boost economic confidence?"

LOW-HANGING FRUIT

Frances Cheung, economist at Credit Agricole CIB, wrote in a note that the initial focus would be on promoting trade. "We note that one thing that is relevant to the RMB (renminbi) is under Point 2, where eligible Chinese banks in the FTZ are allowed to do offshore business, which is not the opening-up of the onshore RMB market as some might have looked for."

The zone, formally titled the China (Shanghai) Pilot Free Trade Zone, is slated to open on Sunday, and China will suspend certain national laws governing the establishment of foreign businesses in the zone effective October 1.

In addition to setting goals for improving financial services, trade and governance, the announcement details initiatives covering 18 different industries ranging from shipping and insurance to education and foreign banks.   Continued...

 
The sunrise rises over the skyline of Lujiazui financial district of Pudong in Shanghai September 27, 2013. REUTERS/Aly Song