China unveils blueprint for Shanghai free trade zone

China has unveiled its blueprint for a hotly anticipated free trade zone in Shanghai, promising to implement a range of ambitious reforms including renminbi convertibility within the next three years.

The new free trade zone, the first of its kind in China, has been hailed by some analysts as the government’s most important push for economic reform in more than a decade. By selecting a small area in Shanghai – just 28 sq kms – for the zone, China’s leaders have a controlled laboratory to experiment with loosened regulations on everything from interest rates to foreign investment approvals.

But it is still far from certain that the free trade zone will live up to its billing and many questions were left unanswered by the plan published on Friday, with the reforms outlined in mostly skeletal terms.

“It will become a vehicle to more deeply integrate our country in globalisation and we will work hard to carry out the reform experiments over the next two to three years,” the State Council, or cabinet, said in a statement. “We will build a free-trade zone that meets international standards for the facilitation of trade and investment, currency convertibility, effective and convenient regulation as well as a standardised legal environment.”

The cabinet highlighted six areas of focus for the free trade zone: financial services; shipping and logistics; commercial trade; professional services such as law and engineering; culture and entertainment; and social services including education and healthcare.

When the government first approved the establishment of the Shanghai free trade zone in July, local officials initially said it would be directed at the logistics sector, lowering tariffs on traded goods. But its significance mushroomed into something much bigger when Li Keqiang, China’s premier, decided to use the zone as a platform for experimenting with a wide-ranging series of reforms.

The Shanghai free trade zone has been likened to China’s use of Shenzhen, the southern city next to Hong Kong, as a special economic zone for testing out basic market reforms in the 1980s.

But after studying Friday’s plan, Lu Ting, an economist with Bank of America Merrill Lynch, said such comparisons overstated what could be expected of Shanghai.

“My overall impression is that it’s good but people should avoid being overly excited,” he said. “Some of the further liberalisations are maybe not so practical. These are very good concepts and people wish to see them happen. But in practice it’s not so easy. It’s not like trade. Finance is invisible and it flows at a very fast pace. It can flow in and out of the zone really easily.”

The government left itself plenty of wriggle room in the way it worded the plan. It said that risks would have to be controlled as a precondition for capital account convertibility and interest rate liberalisation. Moreover, it did not commit itself to full convertibility or rate liberalisation, instead saying that the Shanghai zone would be used to experiment with these reforms ahead of other parts of China.

For foreign companies in China, the plan held out the promise of a much more open business environment. It said the financial services sector in the free trade zone would be fully open to foreign institutions and that foreign companies would also be allowed to participate in commodities trading. But as with all the reforms, foreign companies will have to await detailed implementation rules to gauge what will actually be permitted.

A government adviser who met Shanghai financial officials this week said the details were still being debated and that guidelines would not be published until later this year.

In the run-up to the announcement, investors scrambled to get hold of assets that might benefit from the free trade zone. The prices of houses in the neighbourhood abutting the zone have risen more than 20 per cent, while the stocks of Shanghai-based companies such as logistics companies and port operators have soared, some even tripling in value. But on Friday some of these Shanghai shares tumbled the daily maximum of 10 per cent on doubts about the actual impact of the plan.