Shanghai Free-Trade Dreams Set to Be Dashed; Investors Speculate Wildly on Vague Announcement; Reality Likely to Disappoint

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

AARON BACK

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.

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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