FTZ Shanghai

September 29, 2013

By Greg Sun

China announced plans for a new free-trade zone in Shanghai to bring about change in the financial sector, along with numerous different industries. Once a very sheltered city, is now open for foreign competition, and has the potential to be one of the biggest reform since 1978. Major plans include moving towards a convertible yuan and liberalised interest rates. Such restructuring to a market-oriented financial system are key to a sustainable growth.

With its regional decentralized system, China allows municipalities to experiment with reforms before implementing it to the rest of the country. Such is the case earlier this year when Shanghai’s financial sector was able to experiment the tool of short selling in the capital markets.

Government laws on foreign businesses in the zone will be suspended October 1, where foreign direct investments are more easily to reach the city. With the announcement, speculative investments has already stirred up within and around the zone, as well as rising real estate and stock values with the expectation for further development of the zone. While this reform will ease restrictions to foreigners to invest, its convertible yuan will allow locals to invest internationally as well. An interest rate that is determined by the market will increase competition, enhancing efficiency of services provided and having great implications for state owned enterprises.

In additional to the major reforms, industries such as logistics, insurance, and education will be covered as well. As one of the crucial hubs China, this will put Shanghai at a better place to compete with Hong Kong and Singapore. Although no specific mention of censored websites was mentioned, specialised telecommunication services may be granted on a case-by-case basis. Such could mean freeing Facebook, and put well protected sites such as RenRen and Baidu at a threat.

While this has great potential, some analysts suggest otherwise. Many believe that such a reform would have no real effect to growth, would take several years to figure it out or stabilize. The regional decentralized system as mentioned previously allows for such risky reforms and a very radical reform at such a small scale could prove disastrous, as it is not aligned with the rest of China. With foreign operations freely to operate in Shanghai, how can such business reach customers in Beijing without being physically there. Such risks to foreigners may just scare potential investments away and result in nothing changing in the city and only speculation.

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