Shanghai Free-Trade Zone Sparked Excitement but Is Short on Specifics

September 13, 2013, 6:59 a.m. ET

Shanghai Free-Trade Zone Sparked Excitement but Is Short on Specifics

SHEN HONG

SHANGHAI—Enthusiasm over China’s plans for a free-trade zone in Shanghai has reached fever-pitch levels, with stocks connected to the project rallying heavily, but officials are staying mum on details, and major stumbling blocks remain. Analysts say while companies operating in the 29-square-kilometer zone may benefit from looser capital controls and fewer barriers to trade and investment, it will be years before the testing ground in Shanghai has a more meaningful impact on the world’s second-largest economy.So far, the only official word is a statement from the State Council on Aug. 22 which said this is a “major measure” to push forward financial reforms, though it lacked any specifics.

Nevertheless, an index of 18 stocks that stand to benefit from the free-trade zone have racked up 93% in gains since the statement, according to data provider WIND Info.

The share price of Shanghai International Port (Group) Co., 600018.SH -2.54% the country’s largest port operator, has risen 144% over the period, while Shanghai Jinqiao Export Processing Zone Development Co. has jumped 68%. Both fell on Friday, though, and the broad Shanghai Composite Index remains down so far this year.

“There was definitely a wave of frantic and speculative buying but I think it has run its course, because details of the free-trade zone remain sketchy,” said Zhang Gang, a senior analyst at Central China Securities. “There are a lot of proposals, but people are basically still guessing.”

An official from the Shanghai government’s press office told The Wall Street Journal that he has no fresh information on the matter.

“The markets are still anxiously waiting for the detailed liberalization measures covering not only the industrial and shipping sectors, but also financial services and the services sector in general,” Australia & New Zealand Banking Group Ltd.ANZ.AU -0.33% said in a research report.

The ambitious project also comes with risks. Allowing freer flows of cross-border capital would be instrumental in developing the yuan as an international currency and moving Shanghai forward to being an international financial center. But opening up the flood gates may also allow cash to rush out of the country as the economy slows and jitters rise over the nation’s banking system.

“Failure to adopt liberalization measures in proper order may risk China’s overall financial stability,” ANZ said. “It is unclear how the Shanghai scheme can prevent arbitrage-driven capital flows, as onshore and offshore interest-rate differentials remain large.”

And while the ultimate goal of the Chinese leadership is to replicate Shanghai’s financial reforms across the nation, it is likely to take many years to materialize.

“This is an experiment worth watching but not the game-changer some believe,” Capital Economics said in a research note.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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