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In the zone
Global Times | September 03, 2013 20:28
By Li Qiaoyi
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Skyscrapers in Pudong in Shanghai Photo: IC

Skyscrapers in Pudong in Shanghai Photo: IC

The establishment of the Shanghai free trade zone (FTZ) has been a cause of great excitement for a lot of investors, with stocks related to the zone surging recently.

The central government announced its approval of the city's FTZ plans on August 22, and from August 26 to 30, stocks with connections to the new FTZ soared collectively by 41.04 percent compared to the previous week, greatly outperforming the Shanghai Composite Index gain of 1.99 percent during the same period, according to data compiled by the Beijing-based Securities Daily.

It has also been a source of anguish for those who have missed out on the market surge.

An investor with the handle "xiaohongDC" said Monday on her Weibo that she was "heartbroken" at having let the bonanza pass her by, saying that she should have paid more attention to the country's economic progress and development.

The Shanghai FTZ will cover an area of 28.78 square kilometers, encompassing four existing bonded zones in the city. It has been seen as a big step toward the more sustainable economic development that the new leadership is targeting.

On August 27, the 25-member Political Bureau of the Communist Party of China (CPC) Central Committee, the country's top decision-maker, listened to a work report on the preparations for setting up the Shanghai FTZ.

A statement issued after the meeting said the establishment of the flagship FTZ in Shanghai "will spearhead the CPC Central Committee's endeavor to explore new ways of improving management, advancing the transformation of government functions, facilitating trade and investment, and deepening reform and opening-up of the economy," according to Xinhua.

The South China Morning Post reported Tuesday that the Shanghai FTZ will be launched on September 27, citing unnamed government sources with knowledge of the plan. 

Trade zone confidence

The central government's determination to push ahead with reforms has heightened market optimism about China's economy, despite the structural challenges ahead.

In signs of more widespread confidence, stocks with connections to potential free trade zones in regions such as Tianjin Municipality, East China's Zhejiang Province and South China's Hainan and Guangdong provinces have also risen over the past week, following news reports about FTZ applications by these areas.

"The trade zone stock euphoria will just be a transient phenomenon," said Chang Jian, chief China economist at Barclays Capital in Hong Kong, but she admitted that the establishment of the Shanghai FTZ would unleash new growth vitality and will benefit the economy in the long run.

The surge in stocks related to the Shanghai free trade zone does appear to be abating somewhat.

As of Tuesday's market close, only several related stocks listed in bourses including Shanghai and Shenzhen were still surging upward by the daily limit of 10 percent, while others showed smaller rises or even falls.

"The approval of the Shanghai free trade zone came against the backdrop of talks about the Trans-Pacific Partnership, which are yet to include China," Chang told the Global Times Monday, adding that global uncertainties confronting the economy had spurred the move to develop the FTZ.

The domestic circumstances - "a slowing [Chinese] economy as well as diminishing demographic dividends" - make greater reform and opening-up urgent as well, Chang noted.

The Shanghai FTZ plan has reminded some of the government's bold move on August 26, 1980, when the Standing Committee of the National People's Congress (NPC) approved the establishment of four special economic zones, in Xiamen in East China's Fujian Province, and Shenzhen, Zhuhai and Shantou in South China's Guangdong Province.

The zone in Shenzhen has seen particular success, helping to transform it from a fishing village with just 30,000 inhabitants into a well-known international metropolis with more than 12 million residents.

Deeper reform urged

Most economists interviewed by the Global Times expect that an FTZ in Shanghai - or in any of the other regions hoping to create one - will not have as profound an effect as in Shenzhen, but the zones will help support the sluggish economy, which expanded by just 7.7 percent in 2012, according to revised figures released Monday by the National Bureau of Statistics.

"It's time to call for moves to unleash dividends from systemic reforms," said Chang, noting that the approval of the Shanghai FTZ "is the right decision at the right time."

As well as the opening of special economic zones, the past 30 years has seen China's accession to the World Trade Organization and its rise to become the world's factory, Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co, told the Global Times Monday.

To move on from the export and investment-led growth model, "it is a must to boost the development of the services sector," Lu said.

The Shanghai FTZ, for instance, will be mainly focused on developing the financial, shipping and logistics industries, which will help to guide economic growth toward a model based more on domestic demand.

"New FTZs would definitely be of great importance to economic development in the next decade," Lu noted.

But economists have also expressed concerns about a lack of detailed policies and measures so far, which could weigh on investor sentiment.

"Besides the approval decision, we have heard nothing pragmatic from the government about how enterprises operating within the new FTZ will benefit," Lu said, noting that a detailed policy framework outline is needed.

Four laws governing foreign investment will be suspended for three years in the Shanghai free trade zone, the Xinhua News Agency reported on August 26, offering some clues.

The laws relate to foreign-backed enterprises, Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, and protection of cultural relics.

Zhuang Jian, a senior economist at the Asian Development Bank in Beijing, said that any success with the pilot program will need to be rolled out nationwide as well, or it could affect the country's reform road map.

Unlike the establishment of several special economic zones in the 1980s, which focused on boosting local growth initiatives, the Shanghai FTZ is at the forefront of hopes for the country's wider financial reform, which is "of national importance," Zhuang told the Global Times on Monday.

The period for such a pilot program should not be too long, he said.

However, the risks involved are not great, according to Chang from Barclays, who noted that the new zones won't involve such dramatic change as was seen in the early years of the reform and opening-up period.

"The new moves will be prudent in all aspects, considering the complexity of society nowadays," Chang said.

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