Shanghai free-trade zone a proving ground for wider reforms

The Shanghai Free Trade Zone, scheduled to be launched tomorrow, will become the proving ground for experimenting with economic reforms.

The 29 square kilometre zone along Shanghai's coastline includes existing free trade port areas and the Pudong airport and will combine the free movement of goods associated with a FTZ with the policy-driven initiatives of a free trade area, says Deloitte partner Caesar Wong.

"Shanghai is really special. The Chinese government is saying: 'Can we have another Hong Kong?' Hong Kong is good at business because there are no controls on what you can do."

The FTZ will be a proving ground for further liberalisation of the mainland's capital account and financial services.

Changes are to include interest rate reform and exchange rate convertibility, and foreign banks and insurance firms should have a fast track route to opening branches in the zone.

Analysts at ANZ Bank have compared it to Malaysia's Labuan as a distinct geographical zone with separate monetary policies from the rest of the country, though the exact timeframe for reform implementation is not yet clear, nor are the legal and regulatory structures in place for the zone to fully function.

Given the fungible nature of money, the greatest challenge will be controlling the flow of capital between the FTZ and the rest of China. If capital account liberalisation takes place, the different interest rates and exchange rates will create trading distortions and arbitrage opportunities for traders on both sides of the FTZ.