Shanghai Free-Trade Dreams Set to Be Dashed; Investors Speculate Wildly on Vague Announcement; Reality Likely to Disappoint
September 14, 2013 Leave a comment
September 13, 2013, 7:59 a.m. ET
Shanghai Free-Trade Dreams Set to Be Dashed
Investors Speculate Wildly on Vague Announcement; Reality Likely to Disappoint
Little is known about the new free-trade zone that is being planned in Shanghai. But that hasn’t stopped Chinese investors from speculating wildly on who might benefit. Since a vague announcement on Aug. 23 that China’s top governing body had approved the 29-square kilometer zone in Shanghai, shares in Shanghai International Port Co. have risen by more than 130%. Tianjin Port Holding Co. 600717.SH -1.66% is up 30% over the same period on speculation that other coastal cities will get similar areas. Shanghai Pudong Development Bank 600000.SH -2.78% has risen 30% since last Thursday on expectations that financial controls will be loosened in the zone. The reality is likely to disappoint. China already has export-processing zones, where materials and parts can be imported tariff-free and assembled into exports. It’s unclear what more the government will do to expedite trade.The official announcement, just three paragraphs long, stresses that the financial and services sectors will be further opened up. Analysts and local media reports say there could be steps to loosen controls on foreign-exchange transactions, as part of efforts to make Shanghai an international financial center.
China has long promised to open up its capital account, but progress has been extremely slow, held back by concerns that it could unleash destabilizing outflows.
The Shanghai free-trade zone could be an opportunity for a breakthrough, but it is difficult to see how looser capital controls can be ring-fenced within a specific geographic area. If businesses can transfer money into and out of the zone to take advantage of the looser rules, the floodgates would effectively be opened.
So any freeing of money flows may be minimal. For instance, companies may be able to tap foreign funds only for operations physically in the zone. Or banks in the zone could face quotas on how much they can lend to businesses elsewhere in China. The impact of such moves would be small.
That investors are getting ahead of themselves is nothing new in Shanghai, where trading on the local exchange is erratic and frequently based more on rumors than fundamentals. Besides capital controls and casino-like volatility, systemic problems like weak rule of law and poor corporate governance also tarnish the city’s appeal.
Free-trade zone or not, Shanghai is still a long way from becoming an international financial center.
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