The launch of China’s new free trade zone program is set to open up a new chapter in the country’s financial reform journey.
China has a recent history of using special economic zones to experiment and act as sandboxes for future development on a national scale, Xinhua reported.
In the past 30 years, the country has achieved phenomenal economic growth from an agricultural backwater to the world’s factory and second largest economy by creating special economic zones (SEZs) to lead the way. These SEZs were given greater autonomy and successfully tested the market economy. However, the long-standing advantage in foreign trade that stems from cheap labor and the low cost of land and resources cannot last.
China’s next phase of growth will partially depend on the successful development of its pilot free trade zones.
While the SEZs of the 1980s focused on the development of manufacturing and exports, the establishment of the free trade zones is significant progress in accelerating financial sector liberalization, which is a crucial step in taking China’s deepening economic reforms to the next level. Free trade zones will also have a major catalyzing impact on cross-border trade and investment flows, whilst boosting growth in domestic services and innovation.
New FTZs
A number of FTZs were announced in quick succession since 2013, from Shanghai to Guangdong, Fujian and Tianjin.
China’s central government recently expanded the Shanghai free trade zone, by including sites such as the Lujiazui financial district, making it larger than any of the new FTZs. We believe the expansion will allow Shanghai to give full play to the advantages to test reform on a larger scale.
The Shanghai FTZ is seen as taking the role of creating a regulatory and operating environment for testing new initiatives and market reform. The intention is to lessen the burden for foreign organizations wanting to conduct business in mainland China by removing certain financial and currency impediments and administrative constraints imposed on foreign investors elsewhere in the country.
Convertible Currency
The zone in Shanghai is accelerating capital market development domestically and will also, over the longer term, contribute to the eventual operation of the renminbi as a freely convertible currency, initially in a carefully controlled area.
After Shanghai FTZ came into operation, two-way renminbi flows arising from cross-border sweeping reached more than 27.2 billion yuan between January and August last year. We believe that the offshore borrowing for firms in the Shanghai free trade zone will be relaxed further -- and that the new regulation will include banks is a significant breakthrough.
The risks associated with the zone are proving manageable. A list was put in place to restrict foreign funds from investing in specific industries within the zone. This list has since been shortened, demonstrating the Chinese government’s growing level of confidence. The commercial banks are enforcing know-your-customer procedures to ensure that the funds moving in and out of China are supporting genuine trade.
New FTZs Plans
Since the Shanghai FTZ was announced, more cities have launched their own FTZ plans. FTZs in Guangdong, Fujian and Tianjin will be modeled on Shanghai’s, but would rather advance a new round of the country’s reforms, based on their different economic and geographic locations.
We believe the expansion of the free trade zones will have a significant effect on Hong Kong, Macau and Taiwan, especially on services firms such as banks, e-commerce, foreign traders and other high-end innovative service providers. The free trade zones may prove a magnet to Hong Kong, Macau and Taiwanese investors due to their geographic proximity. Businesses in greater China need to be prepared and monitor developments of the free trade zones in tapping mainland China’s huge market.
Guangdong’s FTZ consists of three regions: Guangzhou Nansha, Shenzhen Qianhai Shekou and Zhuhai Hengqin New District. It will play a key role in deepening economic cooperation with Hong Kong and Macau to drive the liberalization of trade in services.
