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Pilot free trade zone lifts city stature

SHANGHAI has received the green light from the central government to run a trial of the China's first international free trade zone, the latest step in a national strategy to open markets wider and build Shanghai into an international trade and finance hub.

The pilot zone will be located in Shanghai's Pudong New Area, which has always been at the forefront of innovation in economic reforms.

"The experiment is a significant step toward adapting to global development economic and trade trends and a proactive move toward opening up China's economy," the State Council, China's cabinet, said in an announcement after a meeting chaired by Premier Li Keqiang on Wednesday.

In a free trade zone, goods can be imported, manufactured and re-exported without the intervention of customs authorities.

Shanghai already has three areas designated as bonded trade or port zones, but the new one is expected to be far more encompassing. The existing Waigaoqiao free trade zone, for example, is really a "bonded zone" offering certain preferential treatment in customs. The new zone is expected to be a testing ground for free currency exchange, management innovation, trade-related financial services and other market-opening measures.

Its scope won't be fully apparent until more details of the new zone are released.

Encompassing 28 square kilometers, the pilot zone will include the three bonded zones in the Waigaoqiao port, Yangshan Deep-Water Port and Pudong International Airport, where preferential policies are already in place.

"The free zone will benefit China with new advantages in international competition and provide a platform for the country to cooperate with other countries in an effort to explore economic potential," said the announcement.

Yang Xiong, mayor of Shanghai, told a financial forum last month that Shanghai applied to host the pilot program to allow convertible capital accounts in the zone.

Xu Quan

Deputy director, the Shanghai Financial Services Office

The zone will allow Shanghai to liberalize interest and exchange rates as well as some financial products on a trial basis.

Implementation of the trial program is expected to take three years to complete, according to the Shanghai government.

Currently, no further details have been released regarding the plan.

Lu Zhengwei

Chief economist, the Industrial Bank

Reforms in China's manufacturing industry have made outstanding progress since the country's accession into the World Trade Organization in 2001. By comparison, the services industry is lagging behind. Building a free trade zone according to international standards in Shanghai is expected to be a breakthrough for the services sector, which is seen as the new growth engine for China in the next decade. The plan for the zone is expected to push forward reforms in trade, finance and shipping.

At the same time, financial reform will be an inevitable part of the pilot project. It is crucial for the pilot zone to adopt a more flexible exchange rate before opening the capital account, otherwise the move would be too risky.

Li Shuguang

Deputy head, Ping An Bank Shanghai Branch

The establishment of a free trade zone will promote the upgrading of trade. Besides local trade and entrepot trade , there will be offshore trading, futures trading and even bonded futures trading.

The practice within the zone will accelerate the innovation of yuan products in terms of pricing, exchanging and clearing, while gradually promoting the liberalization of the yuan.

The zone will attract financial institutions to provide various products that include offshore financial services, supply chain financing and cross-border yuan financing.

Sun Lijian

Head of the Finance Research Center, Fudan University

A free trade zone is a feature in the opening-up of finance, trade, shipping, innovative management, taxation and regulations, aiming to facilitate the free flow of "people, money and goods" by simplifying business procedures and lowering costs.

The approval of the trial zone in Shanghai indicates the government's resolve to rebalance economic development from a government-led, policy-supported system to a deregulated and more market-oriented mode. To replace a "visible hand" with an "invisible hand" will help China reduce bad assets of banks caused by excessive lending and help ease overcapacity that results from overinvestment.

To support trade liberalization, the pilot zone must develop innovative financial services such as global supply chain financing, which enables lenders to mitigate risk and allows more capital to be raised sooner and at lower costs.

Shao Yu, Zou Hui and Wang Peng

Analysts, Orient Securities Co

The trial zone will be a pioneer in boosting trade, relaxing trade barriers and promoting services trade - a step toward promoting reforms and economic transition in China.

Local financial firms will benefit from increasing demand for financial services, with the free trade zone at the forefront of financial innovation.

Property development and management firms also will benefit as more enterprises settle in the zone. Logistics and warehousing industries will also gain from the trade liberalization and related preferential policies.


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