• Mon
  • Jul 28, 2014
  • Updated: 8:03pm
Mr. Shangkong
PUBLISHED : Monday, 27 January, 2014, 4:23am
UPDATED : Monday, 27 January, 2014, 11:24am

Have free trade zones become a victim of power struggle in China?

Premier's vision for Shanghai to lead the next round of economic reform in the country appears to have fallen foul of power politics

BIO

George Chen is the financial editor and columnist at the South China Morning Post. George has covered China's financial industry and economic reforms since 2002. George is the author of Foreign Banks in China. He muses about the interplay between Shanghai and Hong Kong in Mr. Shangkong columns every Monday in print and online. Follow George on Twitter: @george_chen
 

One, two, three … keep going … 12. Now you have reached the magic number the central government has come up with for free-trade zones to support its new round of economic reforms.

When Xinhua reported last week that Beijing had agreed in principle to approve 12 free-trade zones, responses among many foreign investors ranged from surprise and confusion to downright amusement. Remember, it was barely four months ago that the mainland's first free-trade zone was launched in Shanghai, modelled on Hong Kong's free port.

"If you are going to have 12 free-trade zones in China, then how can you make Shanghai special and attractive when the whole thing is still on trial?" asked a foreign business consultant, who declined to be named.

When Li Keqiang announced the landmark plan to launch the Shanghai zone, the premier told the world that he wanted it to become something that "can be copied" in the rest of the country. But other cities and provinces, including Guangdong and Tianjin, aren't content to just wait to copy Shanghai. Instead, they want their own free-trade zones as soon as possible.

Government sources told Mr. Shangkong that senior officials from Guangdong and Tianjin had aggressively lobbied all their important contacts in Beijing immediately after the plan for Shanghai's special zone was officially announced in July last year. They went to work on decision-makers, including those in the Commerce Ministry and the State Council, in an effort to get something similar approved for the two provinces.

But before you could count to 12, a dozen more cities and provinces followed with their pitches to senior leaders in Beijing for their own special zones. Even the small Zhoushan island in Zhejiang province, near Shanghai, floated an idea to the cabinet for a free-trade zone with a focus on eventually making Zhoushan a free port.

Initially, Li had sought to concentrate on Shanghai alone. Somehow, the sentiment among top leaders in Beijing about the free-trade zone concept changed. Some leaders, after being lobbied by various cities and provinces, preferred a more nationwide "free-trade reform", while others simply felt that Shanghai should not be made too "special". Well, there is nothing new on that front, as Shanghai's success has always stirred jealousy.

But there are downsides for the ongoing free-trade zone movement on the mainland, as the foreign consultant points out. Eventually, if every city and province is operating with more or less the same model, this will lead to more competition for foreign investment and policy support from the central government.

The premier's original initiative to get Shanghai to lead the next round of economic reform in China now appears to have given way to another round of power struggles between city and provincial officials.

When leaders become distracted by power and politics, the country's economic growth will be at risk. Or perhaps Li, insecure about his power, is now backing a wider spread of free-trade zones to win more personal support from local governments.

 

George Chen is the Post's financial services editor. Mr. Shangkong appears every Monday in print and online. Follow @george_chen on Twitter or visit facebook.com/mrshangkong

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whymak
WHY FREE TRADE ZONE
China is still sticking to a cautious experimental approach like a firm test marketing a new product line. 10 experiments under different environments give more information than 1.
A Free Trade Zone will facilitate gathering data and measuring performance. Corrective measures will be tracked and iterative improvements could then be applied as activities in FTZ progress.
Let’s spend a few moments in the classroom. Economic profit (EP) of a firm is defined by:
EP = Revenues (Y) – Return to capital (R) – Compensation to other production factors (W).
In a closed economy, this sums to zero. In an open economy, economic profit measures the competitive advantage of a nation’s economy.
Some companies do better than others. Planners could use accounting profits (AP) measure of firms within FTZ performance and compare it with sum total of similar firms in the economy:
AP = Economic profit (EP) + Return to capital (R).
The accounting profits for all firms within the FTZ can also serve as a performance measure against some benchmark of selected global companies in similar industries. While monitoring and tracking performance results of firms in the FTZ as a group, policy makers can fine tune policies, institutions and process.
Yes, turf battles lurk in every firm and nation. You miss the train this time! Beijing rulers are serious about value-added exports and macroeconomics. Media want to sell juicy stories that only dumb voters read.
XYZ
The core of the struggle for economic leadership lies between Guangdong and Shanghai.
.
Yes, the historic North-South rivalry and jealousy play a part.
.
Which is crazy, because everyone knows that Guangdong is a better place to do business and that the Cantonese are better business people.
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