China just launched
the Shanghai Free Trade Zone. The zone is a 29-square kilometer area that will allow for more liberalized financial transactions and easier foreign direct investment.
While there has been a lot of excitement about what this means for economic liberalization we need to remember that there might be too much hype around it.
Bank of America’s Ting Lu explains that part of the problem with the FTZ is “the emphasis on replicability of reforms and opening up measures in the Shanghai FTZ could limit the scope of reforms within the FTZ.”
He also points out that some of China’s most heavily needed reforms, like those of its state owned enterprises (SOEs), public finance, land ownership, and its Hukou (residency permit) system “won’t be in the spotlight” in the FTZ.
Societe Generale’s Wei Yao argues along similar lines when she points out that interest rate and capital account liberalization along with currency convertibility “are taking a back seat in the experiment, at least in the initial stage.” But she thinks this isn’t necessarily a disappointment.
“Any financial market liberalization concerning capital flows and/or financial market prices, if implemented only in a certain geographic area of an economy, would lead to arbitrage opportunities and, more often than not, to financial market speculation.”
Lu also doesn’t think this will be a threat to the free trade zone (FTZ) won’t be a threat to Hong Kong for two key reasons.
- Ahead of the opening of the FTZ many thought this would be a tax free zone, or have a much lower corporate tax report. But there will be no special tax treatments in the FTZ.
- The replicability requirement “might hinder bold legal and administrative reforms which are crucial for building a center for finance and commerce.”
“We believe markets need to curb their enthusiasms if they hope the FTZ to become a strong competitor of HK, and the FTZ will rapidly unveil a new era of comprehensive reforms for the whole China,” writes Bank of America’s Ting Lu.
Yao hits the nail on the head with the expectations surrounding the FTZ. “Like all previous economic experiments, this project is going to be a work in progress, subject to constant refinement.”