A new enterprise zone could spark wider market reforms — but only if bureaucrats ease their grip.
Shanghai Municipality Communist Party Secretary Han Zheng, left, inaugurated the Shanghai Free Trade Zone on Sept. 29. China’s first pilot free trade zone is billed as a proving ground for the country’s drive to deepen economic reform and test the convertibility of its currency.
For weeks, businessmen have speculated wildly about the Shanghai Free Trade Zone. This showpiece policy is meant to kick-start a broader reform agenda, due to be presented after a big party meeting in November. Despite its name, the zone is more of a special enterprise zone on the outskirts of China’s commercial capital. The prime minister, Li Keqiang, has personally championed the pilot.
At last, on Sept. 29, the zone was launched. Leaders called it a landmark moment, similar to the creation of the Shenzhen special economic zone near Hong Kong more than three decades ago that ushered in reforms and spectacular growth. At a news conference, officials used the word “innovation” 43 times.
Despite the gush, the launch was a letdown. Hardly any senior government figures turned up. The scheme will not include several hoped-for reforms: access to the uncensored Internet, cuts in corporate tax and permission for foreign auctioneers to sell antiquities. More troubling is that few details were given at all. “Show me the beef!” exclaimed Joerg Wuttke, a former head of the European Union Chamber of Commerce in Beijing. He had been enthusiastic, but now fears that officials have grown timid.
Such concerns were hardly allayed when the authorities released a “negative list” of sectors in which foreigners cannot invest in the zone. In theory, a shortlist — banning guns, drugs and pornography perhaps — would be investor friendly. In fact, the free trade zone’s negative list contains over 1,000 banned areas. Local officials insist it will be pared down, but one foreign lawyer grumbled that Chinese officials are simply “addicted to control.”
Given these uncertainties, it is reasonable to ask whether the ballyhooed free trade zone can really become the next Shenzhen. The surprising answer from many experts is a cautious “maybe.”
‘We remain very ambitious’
“Do not be fooled by the early caution,” said Chen Bo of the Shanghai University of Finance and Economics, who has advised the government on the free trade zone. “We remain very ambitious.”
Chen believes internal and external factors are forcing a change in China’s economic model. At home, soaring wages and an aging workforce are pushing China toward the “middle-income trap.” Abroad, rivals are rushing into regional free-trade deals, such as the Trans-Pacific Partnership, that will pry economies open. “China is feeling pressure to up its competitive game,” said Kenneth Jarrett, head of the American Chamber of Commerce in Shanghai.
To keep up, many analysts argue, China must liberalize. As manufacturing is already competitive, that means opening up the inefficient services sector — especially finance. This is where the free trade zone comes in. Services have risen from just half of Shanghai’s GDP in 2003 to 62 percent this year. (In Hong Kong, they make up 90 percent).
By letting experienced local officials experiment with deeper reforms in services inside a tightly sealed zone, cautious types hope that risks — for example, arising from yuan convertibility — can be contained. Louis Kuijs of RBS, an investment bank, argued that only those reforms that work well in the zone will be rolled out, carefully and slowly, elsewhere.
Nonsense, say those hoping for leakage. They argue that the whole point of the zone is to spark broader liberalization that has been stalled for a decade.
Many observers, however, seem willing to give the pilot zone time to blossom. Perhaps this is because they think the zone is irreversibly linked to plans for national economic liberalization. After all, though widely known as the free trade zone, the zone’s legal name is the China (Shanghai) Pilot Free Trade Zone.
And despite the lack of details, the free trade zone guidelines promise to liberalize some important sectors. Officials have outlined six areas where industries will be opened during the next three years: financial, shipping, commercial, professional, cultural and social.
Citibank will be there
Three dozen firms have been given permission to enter. That is meant to be an early show of confidence (though skeptics ask how they applied, since the rules have not been made public). Most are domestic ones, but Citibank, an American banking giant, is among them. Andrew Au, its China boss, accepts that his firm has “no information” about how the zone will regulate banks, but says Citi is going in because “directionally it is the right place for the country to go.” He notes that the Shenzhen reforms also did not offer many details at the start.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.