Asia Briefing: China’s ‘free trade zone’ plans get cautious welcome

Against the background of Premier Li Keqiang’s bold talk of reform in Dalian, groundbreaking plans to allow free exchange of China’s yuan currency in free trade zones are taking shape, although some analysts are urging caution.

As you've read before in Asia Briefing, the first free trade zone (FTZ) is expected to be located over 28sq km on the Pudong side of China's financial hub, Shanghai, and it is seen as a testing ground for free currency exchange, management innovation, trade-related financial services and other market-opening measures.

The FTZ received backing by the State Council last month.

Among the big changes is an easing of capital controls for firms in the zone, which will technically allow yuan convertibility and access to global financial markets. The plans envisage the removal of restrictions on bank interest rates, and both domestic and foreign banks will be allowed to offer a broader range of financial services.

This will make it easier for overseas banks to set up subsidiary or joint-venture operations.

The reforms behind the FTZ include lifting controls on investment in service sectors in the zone, including healthcare, insurance, logistics and other business services. These are currently largely state-owned and not open to foreign investment.

Mark Williams and Qinwei Wang at Capital Economics are broadly welcoming of the reform plans, but they caution against irrational exuberance.

'Not game-changer'

“This is an experiment worth watching but not the game-changer some believe,” they wrote in a research note. “The key new development will be wide-ranging liberalisation of the zone’s service sector, including opening it up to foreign firms. This liberalisation of services marks a key difference with the special economic zones (SEZs) set up in the 1980s, which targeted manufacturing.”

“A great deal remains uncertain. Our best guess though is that the Shanghai FTZ will act as a proving ground for reforms before they are rolled out elsewhere. In this regard, we’d see it as a means to achieving the government’s long-stated intentions of gradually opening up the service sector and the capital account without in itself accelerating either process.”