Shanghai Free-Trade Zone is wake-up call for Hong Kong

The Shanghai Free Trade Zone may not yet be comparable with a free port, and many top leaders were absent at its launch, including its foremost advocate, Premier Li Keqiang , but the leadership's intent to prepare the ground for nationwide reforms that would impact on Hong Kong should not be underestimated.

The launch came not long before the third plenum next month of the Central Committee elected at the Communist Party's 18th congress, which is supposed to set guidelines for the economy over the next decade. Although state media did not directly link the two events, the zone's establishment is significant. Officials have foreshadowed wide-ranging reforms there covering government approvals, trade and finance, and indicated that if they succeed, they will be rolled out nationally over the next two or three years. Taken at face value, this means that if currency experimentation works, the yuan could become convertible sooner than many analysts expect.

Some Chinese media have compared the free trade zone with China's first special economic zone in Shenzhen. That raises questions about how free it really is. Pilot initiatives are still being rolled out. But at this stage the list of things not allowed seems as long as for those that will be permitted. This isn't a free port like Hong Kong and, therefore, potentially less of a challenge. Bolder experiments in financial and non-financial services apply only to activities confined within the small zone. At the same time, such an experiment is consistent with Beijing's approach. In the past it has designated various cities as front runners in particular industries or as social experiments. This can pose a challenge to central control. The virtue of running this exercise in a tightly sealed zone is that any benefit comes with control. The ultimate effect could be to help speed up economic reform nationwide. And that might be the bigger threat to Hong Kong.

Asia's richest man, Li Ka-shing, has warned that the free trade zone will impact Hong Kong more heavily and sooner than people expect. This is a reminder that while there may be no need to worry at this stage about the city's status as Asia's financial centre, we should not be complacent. Beijing appears to be positioning itself to adopt reforms necessary to undertake economic restructuring and put the economy on a more sustainable track. Hong Kong should be ready to seize opportunities this will create to consolidate its position.