The “Shanghai 2020” plan to make China’s largest city into a global financial center has appeared ever less achievable in recent months. The lofty, somewhat ambiguous goal with a not-so-distant deadline has been battered by the poor performance of the Shanghai Stock Exchange and a moratorium on IPOs that could continue for longer than expected.
The government has also made little headway on developing a platform in Shanghai for yuan-denominated financial products, another component of the 2020 plan.
The ambitions for the city may have found a new lifeline in the free trade zone that was announced early in July. The plan will turn three areas in Shanghai’s Pudong district into a microcosm of reform. The directive reportedly came straight from Premier Li Keqiang’s office, adding weight to the announcement.
Shanghai’s free trade zone will be the first of its kind in the country. The pilot will promote the liberalization of China’s interest rate and the free conversion of the yuan, two long-delayed reforms at the heart of the country’s transition toward a full market economy.
It will also set up tax-friendly facilities and promote innovation in financial products in an already bustling area that supported a trade volume worth US$100 billion last year.
It may even be a boon for Chinese gamers weary of playing Counter Strike on their PCs: China could open its market to video game console makers provided the hardware is manufactured on-site.
In the zone
In general, the guidelines for the pilot zone are vague, which could give officials opportunities to fudge on implementing the full scope of the plan. What’s more, the country has a mixed record in guiding announced experimental zones into economic success stories.
Without a doubt, the Shenzhen Special Economic Zone that opened in 1980 has been China’s premier reform experiment, transforming a fishing village into a global center for trade and manufacturing in under three decades.
Not all of these efforts have been so successful. The SEZ in the city of Shantou, which launched the same year in Guangdong province, has been far less successful. Similar zones with preferential tax treatment in Yantai in Shandong province and Lianyungang in Jiangsu province have remained relatively unknown since they opened in 1984.
Fast forward almost 30 years to China’s latest reform pilots in Shenzhen’s Qianhai district and the Zhejiang city of Wenzhou, and some of the problems with zone experiments become more apparent.
Investment into Qianhai, a 15 square-kilometer piece of reclaimed land in Shenzhen, has been slow. The zone, where yuan that has been circulated offshore can easily be reinvested within its boundaries, was launched in June 2012. Earlier this year, it appeared that investors were still waiting on more solid financial infrastructure before putting money into business there.
In the case of Wenzhou, the reforms announced late last year foster a regulated market for private lending to small and medium companies that desperately needed capital. Although regulators allowed the city to construct a regulatory framework for private lending, they neglected to liberalize interest rates, rendering the reform toothless. Local regulators also lacked the expertise to see the measure through.
There are a few reasons why Shanghai has a much better chance of succeeding.
For one, the city already has a talented pool of financial professionals who will be able to implement some of the pilot’s key aspects. Logistically, it has one of the best-equipped ports in the world.
The government has also specifically noted a plan to liberalize interest rates in the zone. Policymakers have hinted at this before. Reformers say it’s necessary. But this is the first time a location has been identified for such a loosening of government control.
Perhaps most important of all, Li Keqiang, China’s No. 2 leader, supports the experiment.
The early success of Shenzhen is often attributed to undying support from some of the country’s most powerful players at the time, including Deng Xiaoping and the father of current President Xi Jinping, Xi Zhongxun.
The Shanghai free trade zone is one of the first manifestations of Premier Li’s plans to remake the Chinese economy. He reportedly even had to fight vocal opposition from some of the country’s top banking and securities regulators to get the zone fully approved.
With this in mind, the Shanghai experiment’s success is central to ensuring the credibility of the new administration. The significance far exceeds the Shanghai 2020 plan.
The pilot is a model for what China as a whole could look like in the future, and an early hint at what the Xi-Li duo might have planned for the country during the next 10 years.