Shanghai free-trade zone

Planning key to free-trade zones

PUBLISHED : Wednesday, 11 June, 2014, 4:19am
UPDATED : Wednesday, 11 June, 2014, 4:19am

Competition among mainland provinces and cities is so keen that what one gets that is perceived as beneficial, the others immediately want. The pilot free-trade zone set up in Shanghai eight months ago prompted a clamour for the same by more than 20 entities, and a dozen preliminary applications have already been approved. But economic experiments cannot be rushed into, as teething problems in Shanghai prove. Beijing has shown welcome prudence in suspending other FTZs until the model is to its liking.

The Shanghai zone is not merely about getting land and funds on preferential terms, as some provincial officials would seem to believe. Central authorities launched the scheme as a testing ground for economic reform and financial innovation. Among the objectives are furthering liberalisation of the renminbi, developing off-shore financial business and implementing a tax policy that promotes investment. It will provide an opportunity to try out practices that will smooth integration with regional and global trade.

Shanghai is a perfect place for such a venture; it is an international financial centre and a transport hub with the world's busiest container port. But while mainland authorities can learn from the example of Hong Kong and have experience with special economic zones like Shenzhen, they are on a steep learning curve when it comes to free-trade zones. The special measures outlined to attract foreign investors are short on detail. A "negative list" of areas and activities off-limits to investors runs to more than 1,000 items, leaving much red tape and a commercial legal framework and freedoms to do business that fall far short of international standards.

If the zone is to succeed, authorities need an international vision. Local officials have to set aside growth-driven policies in favour of genuine reform. The scramble in the 1990s to set up industrial and hi-tech areas, driven by cheap land and low taxes, shows what can happen without planning; declining exports and rising labour costs have caused many to close. Only when there is a clear-cut policy direction that attracts investors should the Shanghai model be emulated.

FTZs such as the one envisaged for Hong Kong, Shenzhen, Guangdong and Macau have been suspended, not scrapped. It would be hugely beneficial, but not all FTZs applied for may be as worthwhile. FTZs can help China move to the next stage of development, but will only succeed if there is proper planning.