Shanghai free-trade zone

Shanghai ahead in China free-trade zone race, eclipsing Qianhai, Hengqin

City's proposal overshadows similar plans for Qianhai in Shenzhen, Hengqin island in Zhuhai and Guangzhou's Nansha

PUBLISHED : Friday, 13 September, 2013, 12:00am
UPDATED : Friday, 13 September, 2013, 3:00am

Shanghai is pulling away as the clear leader in the race to set up free-trade zones on the mainland, casting a cloud over the future of other areas, such as Qianhai, that were clear favourites before and had the blessings of top government officials.

The speed at which Shanghai has dusted off plans to become a test bed for bigger economic reforms, including full capital account convertibility for the yuan, has caught market watchers by surprise even as Qianhai, in Shenzhen, pressed ahead with a charm offensive to attract companies and banks to set up shop within that zone.

The barren stretch of reclaimed land near the Hong Kong border is not alone in feeling the heat. The Shanghai proposal has also overshadowed similar plans for Hengqin island in the Zhuhai special economic zone and Nansha, in Guangzhou, which have also thrown their hats into the ring to become such zones.

"There will be competition between Shanghai and Qianhai in the long run, given both are targeted mainly at the opening up of financial services," said Liao Qun, chief China economist at Citic Bank International. "Shanghai has a higher starting point given the development of trade of goods, but in service trade, the Shanghai free-trade zone is also starting from almost zero."

There will be competition between Shanghai and Qianhai in the long run

A draft policy outlining reforms in Shanghai's recently approved free-trade zone could be released as early as this week, with its interim management plan due on September 27, the official Shanghai Securities News reported on Wednesday, citing unnamed sources. Plans for free-trade zones in southern China come at a time when the government is attempting reforms to rebalance its economy, shifting dependence away from manufacturing to consumption.

The proposed Shanghai zone will cover less than 30 square kilometres, while Qianhai, which has been dubbed a mini-Hong Kong, is about half that size. But it won't be size that matters, as what measures and incentives they offer will determine their success with investors. Focused on finance, logistics and technology and backed by the Communist Party, the proposed US$45 billion Qianhai Bay zone hopes to draw on Hong Kong's expertise.

But while Qianhai has struggled to attract Hong Kong property developers at its recent land auctions, media reports have outlined a slew of initiatives for Shanghai targeting shipping, insurance and health care, among others. The case for Shanghai is also not entirely clear, especially in its ambitious dream to operate as a fully liberalised trading hub for the yuan.

If authorities restrict the companies to conducting all their business within the zone, the impact will be very small, while if the freed-up financial services within this zone were accessible to any firm on the mainland, then it would basically have opened up its capital account, Standard Chartered analysts say. But one thing is certain. Shanghai hosts the country's markets, while Hong Kong is a global financial centre, and the competition will be between these two cities in the long term.

Norman Chan Tak-lam, the chief of the Hong Kong Monetary Authority, said last week competition among financial centres had always been fierce and would be even more so in the future.

"Excel and advance" or "stay put and be left behind!" he said.