Last Sunday, China’s newest free-trade zone was officially launched in Shanghai. This development demonstrates the government’s willingness to open up the financial system, internationalize its currency and ease restrictions to liberalize the financial market and allow for more financial integration on an international level.
The Shanghai free-trade zone encompasses Pudong Airport, the Yangshan shipping port and the Waigaoqiao bonded logistics zone. These three hubs of activity make up a total of about 29 km2 and are about an hour’s drive away from Shanghai’s main financial district Lujiazui.
The establishment of the Shanghai free-trade zone was initiated in July, when it was described “as a boon for the logistics industry.” Plans for the free-trade zone promised lower tariffs on shipped goods along with 56 other measures. Prime Minister Li Keqiang proposed and backed the initiative in the hope that changes to the financial system in the free trade zone will eventually lead to changes to national policy.
Changes within the free trade zone include loosening regulations in 18 sectors, allowing interest rates to be set by markets and permitting the heavily regulated renminbi to be traded more freely for other currencies. This would eventually allow the Chinese currency to be an international competitor to the dollar and the euro on the foreign exchange market. It would also allow Chinese banks to compete with banks like Citibank and JPMorgan Chase.
Concerns include the relative infancy of the domestic finance sector, as Chinese policymakers demonstrate concern with regards to “opening the inexperienced domestic financial sector too quickly to the global market place”.
However, as Stefan Sack of the European Chamber of Commerce in China asserted, the most important outcomes of these changes are the prospects for future liberalization of the nation-wide financial market and the demonstrated willingness of the Chinese Communist Party to reform. As Sack points out, recent changes “[show] that the new government is keen on making reforms.”
Chances are that, if these financial changes prove to be positive, they could spread to other parts of the country. However, for the time being, the suggested changes are not revolutionary. Stephen Green, a Hong Kong-based economist at Standard Chartered Bank said that “there’s a lot of interest, but few people know the details yet.” A bank regulator was also quoted as saying that “many banks have made inquiries but they are still trying to understand what the zone will involve and whether it is worth setting up a branch there,” the regulator said.
This has not put off those investing in real estate. Since the designation of the free-trade zone, house prices have reportedly increased between 30 percent and 300 percent alongside expectations of a boost in the regional and national economy. This comes at a time when home prices have already reached new heights. Various reports announced that housing has already sold out in the far-flung neighbourhoods surrounding Shanghai’s new free-trade zone.
On top of economic changes, there were also hopes and rumors of changes to China’s Internet censorship. However, authorities have been quoted in the People’s Daily and South China Morning Post as denying that they will lift the ‘Great Firewall’ on Facebook and Twitter.
Current reforms are reminiscent of reforms in the 1980s and 1990s, when Deng Xiaoping first set up Special Economic Zones in Shantou, Shenzhen and Zhuhai in China’s southeastern province of Guangdong, bordering Hong Kong, as well as Xiamen in Fujian province. Allowing increased amounts of foreign investment and upping the focus on exports and manufacturing, these zones performed well economically and provided a model for further economic liberalization in China. However, details on how the financial markets linked to the free-trade zone will be monitored are still missing, and these changes are much more difficult to monitor than the changes to the manufacturing industry in the 1980s and 1990s.