Here’s All You Need to Know About China’s New Free Trade Zone

China

China has formally announced plans for the creation of a new free trade zone in Shanghai, Reuters reports. The zone, encompassing roughly eleven square miles on the outskirts o Shanghai, is slated to open this Sunday with certain regulations on international businesses being relaxed starting at the beginning of October. Though the timeline for the zone’s opening is very quick, the timeline for real change in the area will be slower — with some analysts not expecting any monumental changes to be phased in for a couple of years until the Chinese government can get a better feel on how the zone will operate.

Among the reforms expected to be given a chance to shine in the zone are a looser restriction on currency exchange rates and freer interest rates. Both of these alterations are seen as potential moves toward a more full version of capitalism in China, and proponents of the measures claim that they are vital for sustaining growth in the country in the coming years. Skeptics note that China’s planning is what has kept the economy running at a pace well above the world’s average for the past three decades, also warning that a transition executed too quickly could have disastrous consequences. No plan has been announced for other liberalizing policies such as the unblocking of banned websites.

Critics of the free trade zone have plenty to complain about. One prominent concern is the location of the zone itself, which is very distant from the city center. Some businesses may have to choose between locating in the free trade zone to obtain the economic benefits or locating closer to their customers, which could dissuade expansion into the area.

A separate problem exists in the zone because it could provide an arbitrage opportunity for currency traders. If rates inside the zone were substantially different than those throughout the rest of the country, it is not impossible to imagine a scenario where shipments of money are made into the zone and then swapped only to be re-exchanged elsewhere in China for a profit. This is a nightmare scenario not only from the perspective of customs officials, but also from the perspective of the government’s treasury, because it could undermine the value of the yuan.

By announcing the project, China is hoping to foster a scenario similar to the first free trade zone in Shenzhen, where a trial zone allowed the government to see the amount of industry and manufacturing that would flock to the country were it opened up to foreign investors. Some have already called the Shanghai project the second Shenzhen, seeing the potential for a monumental impact on the country’s economy.

In the wake of the news, shares of companies that operate in the zone, such as Shanghai International Port Group, saw their share prices double or triple in value. While not everyone is convinced that the zone will be a success, this is an indicator of the value that at least some investors see in the venture.

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