China cuts ribbon on free trade zone

shanghai free trade opens
China launched its new free-trade zone in Shanghai on Sunday.

China cut the ribbon on its new free trade zone in Shanghai on Sunday, with the government promising to deliver a wide range of reforms to develop the economy.

The zone of about 29 square kilometers is an experiment in promoting trade, expanding foreign investment access and liberalizing the financial sector, all of which are tightly controlled and regulated now by the government.

China's Commerce Minister, Gao Hucheng, said at the ceremony in Shanghai that the free trade pilot "reflects a more active strategy of opening-up."

China's general framework for the area includes expanded foreign access in industries that previously placed heavy restrictions on outside companies, including banking.

The government said that 11 financial institutions have been authorized to launch in the free trade zone, including the Chinese joint ventures of U.S.-based Citigroup (C) and Singapore's DBS. A total of 36 companies have been licensed to launch in the zone, according to state media.

While Citi and DBS are already operating in Shanghai, this green light means they'll be able to engage in China's financial experiments in the free trade zone. That means greater yuan convertibility and looser cross-border currency flows. The banks may also benefit from market-based interest rates "under the precondition that risks can be controlled," according to a blueprint released Friday. The government hasn't said how it will implement these changes.

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Nomura economist Zhiwei Zhang called these measures "rather limited," as they only liberalize some interest rates, such as for bonds, and not deposit rates. "The government is still cautious," he said.

Other sectors the government plans to open up includes shipping, investment management, construction, human resources, medical services and entertainment.

Experts have said a successful free-trade zone in Shanghai is a game changer in the long-term, as the government could roll out similar reforms across the country.

Shanghai's economy has expanded at a slower pace than the national average since 2008, and is likely to see a strong boost, said HSBC economist Hongbin Qu. That's because the free trade zone targets the trade and services sectors, both of which are major contributors to Shanghai's economy. About 60% of the city's GDP comes from the services sector, and Shanghai alone accounts for 20% of China's trade.

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But for the country as a whole, there will be "negligible impact on the economy in the near term," Zhang said. The zone is too small to have "meaningful impact on the macro [economic] numbers."

The opening of the Shanghai free-trade zone comes as China is battling to stabilize its economy after years of exponential growth. Although second-quarter GDP dropped to 7.5%, economic data in recent months has prompted a more optimistic outlook.

The government has put in place some minor stimulus measures to keep the world's second-largest economy chugging along, and more details of the free-trade zone and other economic reforms are expected to be announced in November at a meeting of China's Central Committee.

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