Will the Shanghai Free Trade Zone Live Up to Its Reputation?

China

New announcements have been made by the Chinese government regarding the Shanghai Free Trade Zone. The zone, which opened this past Sunday, has been lauded by many as a test run for the potential liberalization of China’s financial and capital markets.

Comparisons have abounded between the Shanghai zone and the special economic zone established in Shenzhen in the 1970s, which paved the way for China to open its borders for manufacturing and industrial investments. However, the Chinese government is taking care to manage the Shanghai Free Trade Zone with caution, using a deliberate and rational mindset to approach any potential reforms.

One step that the government has already taken is the promulgation of a so-called “banned list” of enterprise activities that are forbidden from occurring in the zone, Reuters reports. On the banned list are businesses related to media, publishing, gambling, pornography, or the providing of internet services. Also banned are the building of amusement parks and golf courses. There are some areas that are notably not on the list, such as the exploration of shale gas, where are sure to draw the eyes of foreign investors.

Some have expressed skepticism that the announcement prefigures a series of constrictions on the zone that will make it little more than a formal distinction rather than a hotbed for serious economic innovation. Skeptics claim that the Chinese government will be reluctant to relinquish control over the country’s financial system, pointing to a lack of certain senior officials at the zone’s opening ceremony as a sign that their interest in the project is little more than superficial.

Proponents of the site argue that it represents a real opportunity for a test run for financial reforms, claiming that it allows the Chinese government to witness what such an economic environment would look like without exposing itself to the backlash that a sudden economic liberalization would certainly cause.

Advocates of the zone have dismissed claims that it will be used to abuse differences in currency value, citing the ability of the Chinese government to physically monitor shipments of cash into and out of the region.

Either way, the zone shows that China is at least investigating possibilities that would help to transition its economy from one driven by production — mainly in the industrial and manufacturing sectors — to one that is driven by consumerism. This would help the country to create a sustainable economy that is less dependent on foreign demand and resources.

In addition, it would boost the wealth of the country’s residents. With Bloomberg reporting that Citigroup and the Bank of China have already signed on board to the free trade zone in Shanghai, watching what happens in the area just may be the key to understanding the direction that China’s future is headed toward.

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