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12 Jul 2013

Shanghai’s free-trade zone

by Ma Xiaoping, Macro Economist, Beijing,

and Qu Hongbin, Chief Economist for Greater China

China free trade zone

Shanghai’s free-trade zone is the first within mainland China

Shanghai has received approval to establish a pilot free-trade zone to explore investment and trade policy innovations and to expand the opening of service industries. The test will involve financial reform, including interest-rate liberalisation and full convertibility of the renminbi.

China’s State Council sees this experiment as an essential step towards upgrading the country’s economy. It expects the pilot to be rolled out nationally, eventually.

Shanghai is expected to allow companies to convert other currencies freely with the renminbi within the zone

Shanghai’s free-trade zone is the first within mainland China. It includes the special customs zones of Yangshan Deep Water Port, Pudong Airport and the Waigaoqiao Port. Trade volumes in Shanghai’s bonded zones exceeded USD100 billion in 2012, or 3 per cent of China’s total trade.

The approval came only days after the high-profile Lujiazui Financial Forum, where China’s financial leaders announced ambitious plans for financial reform. The meeting highlighted Beijing’s support for Shanghai’s development as an international financial centre.

The pilot plan includes four key steps. It will create tax-friendly facilities for trade and investment within the free-trade zone and promote China’s interest-rate liberalisation plus, eventually, renminbi convertibility. It will also encourage financial product innovations and promote the development of offshore businesses.

Shanghai is expected to allow companies to convert other currencies freely with the renminbi within the zone as well as buying overseas assets and equities or raising funding abroad. In addition, foreign investment and funding activities for both domestic and international companies will be promoted there.

The city also plans to test selected offshore businesses within the zone, including offshore banking activities and cross-border financing denominated in foreign currencies. The launch of the free-trade zone is in line with Beijing’s efforts to finalise an operational plan for full convertibility of the renminbi before 2014. China is reportedly expected to liberalise the capital account by 2015.

A free-trade zone in Shanghai could thus be a testing ground for full convertibility while also helping establish the city as a key regional financial, trading and shipping centre in Northeast Asia. It would also help Shanghai’s transformation into a global financial centre.

Shanghai’s free-trade zone trial – following the opening-up of Qianhai (an experimental financial zone in Shenzhen) and Wenzhou (designated a trial area for financial reform) – confirms the commitment of Beijing’s leaders to their plans for eventual full renminbi convertibility and capital account liberalisation.

This research was first published on 4 July 2013.
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