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04 Oct 2013

Free-trade zone will trigger reforms

Qu Hongbin

by Qu Hongbin

Chief Economist for Greater China, HSBC

Free-trade zone will trigger reforms

Shanghai is a testing ground to speed up the liberalisation process

The official launch of Shanghai’s pilot free-trade zone in September 2013 should trigger a new wave of Chinese reforms and liberalisation. It is comparable to the Special Economic Zone in the early 1980s and the Pudong Development Zone a decade later.

Reforms to be tested at Shanghai range from cutting administrative red tape to financial liberalisation. They will probably be rolled out nationwide within three years, fuelling the momentum for further reforms and leading to a chain reaction in financial markets.

The Shanghai free-trade zone gives priority to improving investment access and increased openness in services trade and financial liberalisation, including experimenting with full convertibility of the renminbi. It aims to open up investment in banking, shipping, commercial, professional, cultural and the social-services sectors, relaxing restrictions for investors and equity limits.

The zone should also help two-way trade and investment between China and external markets

The free-trade zone is part of China’s strategic liberalisation plan. Access to the World Trade Organization boosted its economy hugely but the slow global recovery means the era of 20-30 per cent export growth is gone. China needs to sharpen its competitiveness in services trade through deregulation and opening up to foreign investors. The free-trade zone makes Beijing better prepared for joining the new rounds of global trade and investment talks.

The zone should also help two-way trade and investment between China and external markets. The easier investment rules apply not only for inward investment but for outward investment too.

Shanghai is a testing ground to speed up the liberalisation process. It allows foreign and private investors to invest in China’s highly regulated services sectors and these reforms are likely to be gradually extended elsewhere.

After Beijing’s active push for financial reforms, the free-trade zone pilot is spearheading financial liberalisation. This is not only a response to calls for a market-based pricing and regulatory environment, but because Shanghai also aims to become a fully fledged international financial centre by 2020.

The pilot zone should provide a strong boost to the city and regional economies. Shanghai is China’s largest city by GDP but its expansion rate has slipped behind the national average since 2008. Yet as services make up 60 per cent of Shanghai’s GDP and its trade accounts for 20 per cent of national trade, opening up the services sector and free trade should provide a new growth engine.

This research was first published on 29 September 2013.