The free-trade zone in Shanghai is a test ground for new initiatives and market reform

The launch of China’s new free-trade-zone programme is set to take the country’s financial reform into a new chapter. China has grown to become the world’s factory and second-largest economy and it was the special economic zones, set up in the 1980s, that helped lead the way. These zones were given greater autonomy to experiment and test the market economy.

China’s longstanding advantage in foreign trade, stemming from cheap labour and the low cost of land and resources, however, cannot last. The country’s next phase of growth will partially depend on the successful development of its pilot free-trade zones – a new breed of economic zone.

While the special economic zones focused on the development of manufacturing and exports, today’s new free-trade zones will accelerate financial sector liberalisation. Free-trade zones will also stimulate cross-border trade and investment flows, whilst boosting domestic services and innovation.

Free-trade zones will also stimulate cross-border trade and investment flows, whilst boosting domestic services and innovation

The first of the new pilot free-trade zones was announced in 2013. Located in Shanghai, the zone is seen as a regulatory and operating environment for testing new initiatives and market reform. The intention is to lessen the burden for foreign organisations wanting to conduct business in mainland China by removing certain financial and currency impediments and administrative constraints imposed on foreign investors.

The zone in Shanghai is also accelerating capital market development domestically and will, over the longer term, contribute to the eventual operation of the renminbi as a freely convertible currency, initially in a carefully controlled area.

Since the Shanghai zone was announced, more cities have launched their own plans. Free-trade zones in Guangdong, Fujian and Tianjin will be modelled on Shanghai's, but also reflect their different economies and locations.

We believe the expansion of the free-trade zones will have a significant effect on Hong Kong, Macau and Taiwan and on banks, e-commerce, foreign traders and other high-end service providers. Businesses in greater China need to be prepared and monitor how the free-trade zones are tapping mainland China's huge market.

Guangdong’s free-trade zone will play a key role in deepening economic links with Hong Kong and Macau to drive the liberalisation of trade in services. A new wave of cooperation between Guangdong and Hong Kong will focus on developing an integrated regional service industry. The province’s future lies in reorienting its consumer industries towards China's large and growing domestic market and upgrading from low-end manufacturing to develop the high-end services sector.

Fujian is one of the wealthiest regions in the country and will focus on further strengthening links with Taiwan. Current major industries are geared towards electronics, petrochemicals and mechanical components.

Tianjin free-trade zone is expected to focus on high-end manufacturing, financial leasing and further integration of the Bohai Bay area. It will also provide deeper connections with neighbouring Japan and South Korea.

There is much work remaining to be done. Many financial reforms in favour of liberalisation have been announced and are at the early stage of development. However, China has always sustained a cautious approach. The free-trade zone chapter in China’s economic development has only just begun, and further free-trade zones will initiate broader reform and growth.

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