Questions linger on Shanghai's free port

It is unknown if the city's free-trade zone will succeed as a radical move to revive exports or merely amount to piecemeal reforms

PUBLISHED : Monday, 05 August, 2013, 12:00am
UPDATED : Monday, 05 August, 2013, 4:00am

The go-ahead to build its own free-trade zone might enable Shanghai to shake its export business out of the lethargy into which it has declined, and restore the sector to its former role as the mainland's economic locomotive.

But at this stage much remains uncertain about the plan to create the mainland's first free port in the city.

Shanghai first entertained ambitions of developing a Hong Kong-style free port more than a decade ago, in the belief that flourishing cargo and capital flows could help the city's ambition to become a gateway to China. But it was not until last month that Beijing officially gave it the go-ahead to build the free-trade zone, also known as a free port. The approval came in times of trouble as Shanghai's exports and imports continued their downward trend in the first half of the year.

In 2012, the combined value of exports and imports edged down 0.2 per cent from a year earlier, the first time trade figures declined since 2009. In the first six months of this year, exports dropped 4.3 per cent from the year-ago period while imports decreased 3.2 per cent.

Weaker external demand, a strengthening yuan, and a credit squeeze at home have been wreaking havoc on the mainland's export-oriented businesses over the past two years.

Shanghai spearheaded China's move to integrate its economy with global markets after the country adopted an "opening-up" policy in the 1980s. Exports and imports were to be the key gauge of the economic success of the move, and one of the major growth drivers of the economy. A free-trade zone, into which goods can be imported, processed, and then re-exported without custom duties, will help achieve this objective.

Yan Jun, chief economist of the Shanghai Statistics Bureau, told reporters recently that a free-trade zone would do more than offer a series of preferential policies. Instead, a series of bold reforms would be carried out on the comprehensive platform aimed at facilitating investments and trade.

But the central government has yet to publish a detailed guideline on the operation of the free-trade zone in Shanghai.

"Lingering questions remain about the policymaking," said Wang Xuefeng, a professor at Shanghai Maritime University. "The guidelines governing the operations of the zone will determine its future size and scale."

From what is known Shanghai will initially upgrade three existing bonded areas into a free-trade zone. The ultimate aim of officials is to expand the zone to a larger scale and establish a trading, shipping, and financial centre in Shanghai to rival Hong Kong.

Shanghai Communist Party boss Han Zheng told a government conference that the free-trade zone would be the priority for the local government in the second half of this year.

"Shanghai is desperate to find a new growth engine, and the top city officials want to bet on the free-trade zone to pursue fast growth," said a government official who declined to be identified. "The city has lost its edge in manufacturing, and the efforts to transform itself into a financial centre have so far proved unsuccessful."

To attract foreign capital and domestic investors to establish manufacturing facilities in the new free-trade zone, the city has to earmark a vast area while ensuring the land costs are reasonable, economists said.

The Shanghai Commission of Economy and Information said the city was under pressure to chase industrial output growth since an increasing number of manufacturers were relocating their production lines to other parts of the country due to the higher land and labour costs.

"The outlook for the free-trade zone doesn't seem bright," said Xiong Hao, an assistant general manager of Shanghai Jump International Shipping. "If land supply for manufacturers is limited, and there are not enough reductions in regulations to bolster shipping, finance, and commerce inside the zone, it would be of little help to the city."

The State Council said in a statement that the free-trade zone in Shanghai would be only on a trial basis. If history is a guide, in China, a trial run means the government will take only small steps at first - too small to be effective, say the critics.