FTZ Viewed with Hope, Skepticism

Shanghai's pilot free trade zone is intended as a showpiece for possible broader reform in China. US investors have high expectations, as well as doubts, as Yuwei Zhang reports from New York.

More than 90 policies cover five major economic areas. There's a 10-page "negative list" putting 18 major sectors (with 1,067 subcategories) of business off-limits to foreign investors.

The list also has 190 special regulations, which outline additional sectors closed to foreign investors.

Welcome to the China (Shanghai) Pilot Free Trade Zone), a 29-square-kilometer project launched late last month that's raising expectations — and doubts — within the nation and overseas.

The FTZ is frequently likened to the Shenzhen Special Economic Zone, which since its establishment in 1980 has boosted manufacturing and exports and attracted overseas investments. Some predict the FTZ will threaten Hong Kong's position as an established financial hub.

"If we think about the Shanghai free trade zone as a test market — as Shenzhen was — so what's learned in Shanghai can be rolled out to the rest of the country, that would be a very big deal, that would be truly a ‘reform and opening up' 2.0," said Carlos Gutierrez.

He's the former US secretary of commerce, now a vice-chairman of the Albright Stonebridge Group, a global strategy firm led by Madeleine Albright, the former US secretary of state.

"I don't think it's unrealistic to have high expectations," Gutierrez said in an interview with China Daily. "China has always exceeded expectations."

Located on the outskirts of the coastal metropolis of more than 23 million people, Shanghai's FTZ is expected to explore ways to reduce government intervention and open up the world's second-largest economy to international investment.

"This is in line with global economic trends and reflects a more active strategy of opening up," said Commerce Minister Gao Hucheng at the zone's inauguration ceremony.

The timing of the zone's formation — just before the Third Plenum of the 18th Central Committee of the Communist Party of China — also has been widely discussed.

Experts believe that the zone is a testing ground for policies and procedures that will expand into other parts of the country. They also believe that the FTZ represents a commitment by the country's new leadership to deepening market-oriented reforms and boosting the economy.

"In the buildup to the Party's Third Plenum, there has been much speculation over the policy priorities and reform initiatives," said James Sinclair, managing partner of InterChina, a Shanghai-based strategy and merger-and-acquisition advisory firm that focuses on China.

Bulls vs bears

"The establishment of the Shanghai FTZ has been feeding this speculation," added Sinclair, who has lived in Shanghai for the past decade. "The China bulls are using the FTZ to project their hope for sweeping reforms ahead. The China bears remain skeptical, pointing to the FTZ's lack of detailed policies and initiatives, and concern about the prospects of the Third Plenum unveiling meaningful reforms."

Gutierrez said that the creation of the FTZ shows that the new leadership is serious about economic reform, and the project is one way for the nation to "offset" the pressure of losing manufacturing competitiveness because of wage increases.

"They are serious about reform and they understand that manufacturing is changing. As wages increase, manufacturing may go overseas, so China needs another growth engine," said Gutierrez. "And that growth engine could be the combination of a more open economy and more liberalization of financial services and other services."

As many link the rationale behind the creation of the new zone to the new leadership's economic reform agenda, Bo Chen, who advised the government on the zone, said that it was also driven by slower economic growth in China and "foreign aggression".

The influence of the Trans-Pacific Partnership Agreement is one example of that aggression, Chen wrote in a recent online commentary. Initiated in 2005, the TPP requires member countries to eliminate all tariffs and open their agricultural and financial services as part of the pact's bid to build a unified market in the Pacific Rim by 2020.

Membership in the trade pact grew significantly after the United States signed up in 2008.

The TPP was not immediately welcomed by some Asia-Pacific countries. Japan and Vietnam were persuaded by the US to join the negotiations, and China said that it would consider doing so in the July round of the US-China Strategic and Economic Dialogue.

"Despite rumors about what reforms the FTZ may herald, its long-term policy objectives will generally remain consistent with the requirements of the TPP," said Chen.

A close look at the zone shows that it does offer some policies that might attract foreign investment, especially when every global company wants a success story in China.