China Is About To Open A New 'Free Trade Zone' And People Are Excited That It Could Lift The Economy

There is a lot of chatter surrounding the Shanghai Free Trade Experiment Zone that is set to open on September 27.

The zone is being set up to allow for renminbi convertibility, tax-free trade environment, and fewer restrictions on foreign direct investment.

While specifics on the Shanghai free trade zone aren’t clear yet, Stephen Green at Standard Chartered points out these key characteristics of the zone:

  • FDI – The current foreign direct investment (FDI) regulation will be suspended for the zone. Basically, “licence approvals will be easier, the scope of business restraints should be relaxed, and full foreign ownership will be allowed in more sectors than currently permitted,” according to Green.
  • Taxes – “The China (Shanghai) Free Trade Experiment Zone (CSFTEZ) could allow duty-free imports and re-exports.”
  • Services – The zone could have schools and hospitals. Unlike the special economic zones (SEZs) which had manufacturing services, the CSFTEZ will also include financial services.
  • Convertibility – Officials are considering allowing free convertibility of the renminbi in the free trade zone. “On the one hand, if the authorities restrict the companies to conduct all their business only within the zone, the impact will be very small. On the other hand, if the freed-up financial services within the zone are accessible to any firm in China that merely sets up a representative office in the zone, China would basically have opened up its capital account.”

The zone is 29 sq kms and spans Shanghai Pudong — including the Waigaoqiao Free Trade Zone, the Yangshan port, the Pudong Airport area and the Waigaoqiao Logistics Bonded Zone.

The zone will be overseen by the State Council. Shanghai’s Vice Mayor Ai Baojun was named head of the zone, his background in the steel industry has Green thinking that the zone could focus more on industry and trade, over finances.

But these zones won’t be the major driver of the reform that China needs, according to Green.

“Many other cities may well set up zones over time, and a patchwork of zones with liberal business regulation, more open investment rules, and freer Chinese yuan (CNY) convertibility would definitely be a good thing.

“However, we are yet to be convinced that such zones will be the primary driver of reform in China. Their expansion will take time, their scale will be small compared to the broader economy, and it is unlikely that the zones will have a big impact on activity outside of them. Moreover, it is worth bearing in mind that the PBoC has a clear plan to open up the capital account, for example, for the whole country in the next 5-10 years (cross- border lending, for instance, is rapidly being expanded) and that Premier Li has made simplifying and eliminating regulation countrywide one of the priorities of his administration.”

Of course opening up the capital account brings the risk of capital outflows, one of the major reason’s China has been slow to liberalize.

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