Shanghai Launches Free-Trade Zone
In a brave attempt to overhaul their economy, China opened a free-trade zone in Shanghai on Sunday. The second-largest economy in the world announced last July that a free-trade zone would be developed in Shanghai, in the hope of giving their economy a boost.
A free-trade zone is a specific area inside a country where businesses can import, export, and manufacture without the limits of a country’s usual rules and taxes. The idea of free-trade zones isn’t new to China. Back in the late 70s and 80s, a zone was set up in Shenzhen, near Hong Kong, with the hope of building up the manufacturing industry. This is what helped lead China to becoming the powerful economy they are today, but if they want to stay near the top, they need to address certain issues now. Issues like the growth of their economy being the slowest it has been for 13 years – last year it only expanded by 7.7%.
The free-trade zone covers roughly 29 sq km (11 sq miles), and now that it has been set up, the businesses inside the zone will be able to experiment with areas normally tightly controlled in China. These businesses will be able to set up their own interest rates, instead of the government doing it for them. This applies to banks that are set up in the zone as well.
At the opening ceremony for the free-trade zone, Commerce Minister Gao Hucheng said that he thought the zone would open up the financial system. “The establishment of the free-trade zone is a significant move for China to conform to new trends in the global economy and trade,” he said.
The approach is more of an experiment to see what free-trade zones can do for China, with things obviously working different to how they are used to. Clearly, the free-trade zone is backed by the new Chinese Government and its Premier, Li Keqiang, who took office in March.
Stefan Sack from the European Chamber of Commerce in China doesn’t think the Chinese government should worry about any changes. He said that the new zone “shows that the new government is keen on making reforms… A free-trade zone in Shanghai will not change how business is done in China.”
“The overarching theme of all the reform in the 1980s and 1990s was, simply put, liberalisation,” stated Yao Wei, an economist at Société Générale. “Local experiments in strategically important cities not only serve as policy signals of reform commitment but provide guidance as to the path of upcoming changes.”
The hope is that the financial changes from the free-trade zone will spread to the rest of the country, which will open up their financial system and in turn internationalise their currency. Some of these changes include foreign companies being able to invest in markets in the zone, as well as the previously banned sale of games consoles being lifted, among other changes.
Benefits have already been seen from the zone being introduced. Property prices have risen near the zone, and the shares of the companies publicly listed as being in or near the zone are also on the up.
Liao Qun, China’s chief economist at Citic Bank International, says “liberalisation may not be realised all at once” – meaning that although many people are anxious about the free-trade zone tending to their economical worries, it can’t be expected to be a magical overnight solution. No timeline has currently been set for the zone, but new rules will be introduced over a three year period, and then they will take another look at the system.
Overall, the free-trade zone will provide hope for the Chinese people that they will be set on a sustainable economic growth path once again.