How does Shanghai’s Free Trade Zone (FTZ) fit in China’s overall trade policy? asks Duncan Innes-Ker, regional editor for Asia at The Economist Intelligence Unit.
Another week, another small step forward for liberalisation in Shanghai's FTZ as the People's Bank of China (the central bank) revealed on February 26th that controls on interest rates for foreign-currency accounts of less than US$3m would be completely removed.
Since its launch in September 2013, the FTZ has been dogged by complaints that the reality of reforms on the ground has failed to live up to the hype that surrounded the project. This perception has been partly driven by the lack of clarity over the special measures that would apply in the zone. However, there has been a steady drip-feed of announcements in recent weeks laying out the implementation of regulations that will govern business in the FTZ, which is helping to address these complaints. So far, the Internet and financial services seem to be the main beneficiaries, but further announcements in the coming months are likely to see additional sectors addressed.
The use of pilot projects to test key reforms is a very traditional bureaucratic technique in China. It is favoured partly because demonstrating that a particular reform has already delivered success helps to overcome political opposition to changes. Deng Xiaoping used the tactic extensively, beginning with agricultural reforms in Sichuan and Anhui in the late 1970s and early 1980s. Shanghai's FTZ draws closely upon the experience and results delivered by Deng's special economic zones (SEZs), which were established in several cities in the 1980s.
The reputation of pilot projects has dimmed in the last decade, as fewer have moved beyond the testing stage. Experiments with political liberalisation have largely fizzled. Efforts to advance important economic reforms such as land reform (notably in Chengdu and Chongqing) and property taxes (in Shanghai and Chongqing) have also been perceived as failures. Sometimes this has been because of a lack of local political support, sometimes because the reforms were simply ineffective. Studies have found that without strong top-down support, pilot reforms in specific regions often fizzle once the leaders responsible for them move on to new postings and bureaucratic inertia re-exerts itself. It is notable that one of the few success stories of recent years, the "new areas" in Tianjin's Binhai and Chongqing's Liangjiang districts achieved results largely because of massive central support.
The priority that the government has given to Shanghai's FTZ suggests that it will receive the necessary level of central support to make it a success. The reforms being advanced there are closely tied to the Beijing leadership's goal of liberalising and opening capital markets. The fact that other cities are already reportedly pushing to be allowed to set up their own FTZs also suggests that they see the scheme as important for China's leaders.
It is less clear whether the centre is as committed to liberalisation on the trade and investment side. The decision to opt for equal treatment of foreign and local investors, and to use a "negative list" for foreign investment—moves long demanded by US negotiators—would certainly ease the path for a bilateral investment treaty with the US. However, China remains very much on the sidelines of the recent push for mega-trade deals like the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP), with its focus instead on Asia-based deals that would require less broad and deep opening. For now, Shanghai's FTZ is unlikely to be used as a launch pad for major trade agreements.
