The Shanghai free trade zone has definitely been one of the most spoken-of events of this end of year here in China. Since the “official” opening on September 29th, companies and entrepreneurs from all around the world have been speculating on what reforms would be implemented in the zone, and what is there to gain for compagnies to register there. Although, what will come out of it is still quite unclear, prospectors are already waiting in line to register their business.
The pilot free trade zone will cover a area of 11 square-mile district that covers 4 different areas : Shanghai Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port and Shanghai Pudong Airport Free Trade Zone.
Why is China opening this free trade zone ?
Since 1978, the central government has decided to reform and remodel the country’s economic setup. During the 1980′s, China opened up different Special Economic Zones (SEZs), such as Shenzhen, Zhuzhai and Shantou in Guangdong province, and Xiamen in Fujian Province. At that time, those zones were mainly opened to facilitate the export of processed goods. Many policies were implemented there in order to attract foreign investments. This considerably helped certain regions (as well as the overall economy of China) to develop over the past decades. Today, China has realized that its system, which heavily relies on trade, will know its limits at some point. The creation of this new zone in Shanghai aims at pursuing the economic reforms toward another end. As the economic growth is slowing (China’s economy expanded 7.7% last year, its slowest pace in 13 years.), the government is looking for new ways to create and sustain growth for the country. This time, the financial-sector changes are at the heart of the experiment. It is also pushing toward in increase in the service sector’s part of the GDP. Since 2003, the service sector went up from 50% to 63% in Shanghai, and this trend will continue. This zone is primarily opened as a test zone, to see how does the market react to those new reforms. It’s only the beginning of a new chapter of the Chinese economic development.
What actual changes will it bring ?
Since early September, everybody has been speculating on which policies would take place in the zone. Some people thought the internet censure would disappear (very unlikely) or that the yuan would enjoy free convertibility and that the interest rates would be set by the market forces rather than by the regulators of the Central Bank. The possibility of seeing those polices in application is still unknown, as a precise schedule of the reforms is still missing in the picture. We only know that those new rules will be implemented over a 3-year period. The main point that stands out is that the China (Shanghai) Pilot Free Trade Zone will explore the trial of a foreign exchange administrative system that is in line with international practice to better facilitate trade and investment. If you want to have a better view of what the government is expecting, we recommend you to have a look at the Framework Plan for the China (Shanghai) Pilot Free Trade Zone.
What’s next ?
Seeing the Shanghai pilot free-trade zone as an end would be wrong. It is really the start of another chapter for China, and it is clear that this system, when proven sustainable, will be replicated in other areas of the country. Namely, Tianjin and Ningxia have both been cited by news to be the future cities where such zones could be implemented. From now on, one can only wait and see. First, wait for the first policies to be implemented. Then, witness the new chapter of the Chinese economic miracle setting out in front of us.