Shanghai’s new zone: lots of hype, little detail

September 26, 2013 10:58 am

Shanghai’s new zone: lots of hype, little detail

By Simon Rabinovitch in Shanghai

The anticipation for China’s new free trade zone, set to be launched this weekend, is at fever pitch. Homes next to the zone in Shanghai’s far-flung suburbs are sold out. The stocks of companies expected to benefit have surged, some rising by more than 300 per cent over the past month. Economists have hailed it as China’s most significant reform push in more than a decade.Just don’t ask any of the homebuyers, investors or analysts what the free trade zone will entail exactly, because, for now at least, they are all still mostly in the dark.

When the State Council, or cabinet, approved the establishment of the Shanghai free trade zone in July, local officials initially described it as a boon for the logistics industry. They said it would lead to lower tariffs on goods shipped through the zone – an important development, though hardly a revolution.

But since then, speculation about what else might be included has snowballed. The cabinet has suggested that it will be used as a test ground for financial reforms. Interest rate deregulation, a convertible exchange rate and an elimination of investment restrictions for foreign companies are all being discussed, according to government advisers.

“This should be a huge deal for China. Shanghai officials previously thought this was a city initiative. Now, it’s a national initiative,” said Liu Ligang, an economist with ANZ. “Premier Li [Keqiang] has taken it over and wants to use the zone as an experiment to fast-forward domestic service sector liberalisation and capital account liberalisation.”

These steps are all part of China’s long-term blueprint as the government tries to shift the economy away from a reliance on investment and towards more innovative industries. But it is tough to overcome entrenched bureaucratic opposition to these reforms and risky to implement them on a nationwide basis.

Hence the decision to focus the reform effort on one specific place. By selecting the Shanghai free trade zone as a crucible for change, Mr Li is taking a page out of the playbook followed in China since the early 1980s when the government pioneered market reforms in the southeastern city of Shenzhen before spreading them around the country.

State media have said the government will officially launch the zone on Sunday with an announcement of 56 different measures. Many of these will be phrased in general terms at first and will only be fleshed out in coming months.

“My sense is that they are still figuring things out and final details are still being heavily debated,” said an adviser who met Shanghai financial officials this week.

The hopes for reform are a lot to fit into a small physical space. The free trade zone will encompass three locations: Pudong airport, the Yangshan shipping port and the Waigaoqiao bonded logistics zone. Altogether, the three are just 28 sq km and they are as much as an hour’s drive from Lujiazui, Shanghai’s main financial district.

Premier Li [Keqiang] has taken it over and wants to use the zone as an experiment to fast-forward domestic service sector liberalisation and capital account liberalisation

– Liu Ligang, an economist at ANZ

The Hong Kong-based South China Morning Post reported this week that the government would also suspend its internet controls – the ‘great firewall of China’ – in the free trade zone, giving people access to sites blocked elsewhere in the country, including Facebook and Twitter. There are no residents in the zone – only offices, factories and hotels – but such a move would still be a strong symbol of the government’s reformist intent.

Ahead of the official launch local authorities have been busy sprucing up the sites. Workers this week power-washed the sidewalks of the Waigaoqiao logistics zone, polished the steps leading up to its buildings and painted its lampposts. A large stone gate with the zone’s name carved into it – “China (Shanghai) Pilot Free Trade Zone” – has already been installed.

On the assumption that it will be a big success, especially for the Shanghai economy, investors have been piling into the stocks of local companies. Among the beneficiaries are Shanghai Material Trading, a logistics company, and the Shanghai International Port Group; their shares are up, respectively, 307 per cent and 152 per cent since July.

The property market near the soon-to-be free trade zone is also on a roll. Housing prices have soared 20-30 per cent in one month in the area just outside the Waigaoqiao gates, according to Shanghai Yuexin Real Estate

“It seems crazy to me. Nobody knows the exact situation about the zone and they didn’t even take a look at the homes before buying them,” said Xi Xinlei, a Shanghai Yuexin agent.

Even if the investors may have gotten ahead of themselves, they are in good company. Li Ka-shing, the Hong Kong tycoon who is Asia’s richest man, has predicted the zone will help Shanghai eat into Hong Kong’s business.

And others too concur. “I’m on the optimistic side. There is vision here and strategy on the part of Beijing to do an end-run around some of the bureaucracy,” said Stephen Green, an economist with Standard Chartered. “Reformists are very excited and this is a good thing.”