The Sharp End: winter 2013 — getting in the (free-trade) zone in China

By Chunfai (CF) Lui

Thirty years after China began a process of economic reform with the introduction of special economic zones, it is now launching a ground-breaking economic experiment. Inside a new type of free-trade zone, it is attempting to test-run an opening up of its financial system, easing restrictions in foreign and private investment, loosening controls on its currency and permitting markets to set interest rates. The plan is that if this experiment in financial reform succeeds, then it will be replicated in other parts of China. At the official launch of the trial zone, 36 Chinese and foreign companies were granted licences to register. In the two months since then, around 700 companies have registered.

While China continues to attract inward investment, with foreign business looking to capitalise on growth in the Chinese consumer market, it has always been a challenge dealing with the country’s red tape and bureaucracy. The new leadership in China is seeking to overcome these difficulties by easing economic restrictions in a pilot free-trade zone in Shanghai. This is an ambitious project to cut red tape for foreign companies, as the government aims to re-position Shanghai as an international financial centre. At its official launch, commerce minister Gao Hucheng said: ‘The establishment of the Shanghai free-trade zone is a significant move for China to conform to new trends in the global economy and trade.’

The new free-trade zone covers 29km2 (11m2) and combines four existing bonded zones in Waigaoqiao and Yangshan ports and the Pudong airport. While foreign exchange convertibility remains under tight control in China, the new free-trade zone will be given special treatment, with full convertibility of the Renminbi. In particular, foreign exchange connected with capital account (investment inflows and outflows) will be relaxed, which until now has been tightly regulated compared with monies flowing into and out of China for trading purposes. This signals a bold move for China, which has always been wary about foreign exchange speculations on the Renminbi…

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