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China launches free trade zone in Shanghai

China launches free trade zone in Shanghai

China Sunday launched a major free trade zone seen as a testing ground for long-awaited market reforms in the world's second largest economy.

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By AFP 30.09.2013

China Sunday launched a major free trade zone seen as a testing ground for long-awaited market reforms in the world's second largest economy.

Commerce Minister Gao Hucheng attended the opening ceremony for the zone, which covers 29 square kilometres (11 square miles) in the country's commercial hub Shanghai.

Reforms in the zone will be closely-watched as a test of China's ability to make structural changes as it tries to realign its economic model in the face of slowing growth.

"The establishment of the Shanghai free trade zone is a significant move for China to conform to new trends in the global economy and trade, and implement a more active opening-up strategy," Gao said in a statement.

The government will allow free yuan convertibility under the capital account on a trial basis, according to a statement released by the State Council (cabinet) on Friday.

Market-set interest rates, seen by analysts as a key reform for China's economy, will also be trialled, according to the statement.

Restrictions on foreign investment will be eased inside the area, which will also loosen controls on 18 service sectors ranging from finance and shipping to cultural services.

Several financial firms including US-based Citibank, and China's "big four" state-owned banks, will open branches in the zone, according to the Oriental Morning Post.

International firms including Microsoft and Porsche are involved in investment projects there, the newspaper said.

Excitement at the launch has boosted stocks of Shanghai-based firms and spurred a rally in home prices and land costs in areas bordering the zone in the past few weeks, state media has reported.

But analysts interviewed by AFP adopted a cautious approach.

"It shows that the new government is keen on making reforms," said Stefan Sack, vice president of the European Chamber of Commerce in China.

"We have to see what kind of regulations will really be implemented there."

But he added that "a free trade zone in Shanghai alone will not change how business is done in China".

Unlike with previous special economic zones launched by China's government, the emphasis in the Shanghai free trade zone (FTZ) on the service sector, rather than export-oriented manufacturing, has been welcomed by economists.

The government has been struggling to shift the domestic economy away from dependence on big-ticket investments and exports, and more towards consumer demand, as the key growth engine.

President of the US Chamber of Commerce in Shanghai Kenneth Jarrett said the zone's plan showed a clear emphasis on service sectors.

"It suggests that the government does plan to have the service sector as a major component of what the FTZ will do," he said.

"Our members are eager to find out more. But there is a sense that the zone could offer real opportunities for our member companies."

The project has been pushed by Premier Li Keqiang, who took office in March. He hopes it will be a model for future reforms nationwide, analysts and government officials have said.

Li has called for an expanded role for the private sector, and a plenum of the ruling Communist Party scheduled for November is expected to announce nationwide economic reforms.

But analysts say major changes are likely to be cautious and subject to lobbying from interest groups which benefit from the current economic model.

"Li Keqiang... seems to be associating his office and his own reputation with this initiative, which is why people are taking it as the first indication as we get close to the plenum of what the economic reform agenda will look like," Jarrett said.

China's economy expanded 7.7 percent in 2012, its slowest pace in 13 years. Year-on-year growth stood at 7.7 percent in the first three months of this year and slowed further to 7.5 percent in April-June.

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