Read more in Daily Special: Shanghai pilot FTZ to be inaugurated on September 29

China is to officially launch the China (Shanghai) Pilot Free Trade Zone (FTZ) on Sunday. The creation of a super Shanghai FTZ represents a new major step in the concept of Special Economic Zones pioneered by China since 1979 under the leadership of Deng Xiaoping. Based on the drafts that have appeared in the public sphere, the Shanghai FTZ would start from a relatively confined area in the Pudong New Area but potentially grow over time to involve a larger part of Shanghai.

It would involve not just a free trade mandate, but more importantly serve as the testing ground for China's gradual opening of its capital account, increased convertibility of renminbi and fuller involvement of the country into the global economy.

This major step forward in China's economic reforms is very significant for three key reasons.

First, it indicates the willingness of China's new leadership to move to a new stage of economic reforms, similarly to what Deng Xiaoping initiated in 1992 with his southern tour. The mandate given to the Shanghai FTZ deals with the most advanced and most sensitive aspects of China's global rebalancing efforts, namely the foray into a freer capital account and stronger presence into global financial markets.

This latest stage in China's reforms follows on commitments made by China at the G20 to move toward significant relaxation of controls on the yuan. At the same time, this pragmatic move recognizes the institutional steps that must occur to make this transition a success.

Thus, experimentation with one area only gives a chance for the country as a whole to test new policies and institutions within a limited sphere.

Second, the Shanghai FTZ seems to be designed with a view to act as a signal that the Chinese model continues to evolve and has the ability to generate further institutional growth. This step is part of China's overall strategy to counter a perceived sense of Chinese economic impasse and to counter the Trans-Pacific Partnership approach led by the US through renewed excitement in the Chinese model. It underlines the increasingly competitive nature of the political economic environment of the Asia-Pacific region. With this move, the government is positioning Shanghai (eventually) to emerge as a future financial leader in Asia, with all the risks and hard work involved.

Third, the Shanghai FTZ seems to indicate a major victory for Shanghai itself and the reassertion of the Yangtze River Delta at the core of the Chinese political economy. It underlines the competitive nature within the Chinese domestic economy. It may lead to counter-strategies by Guangdong Province, Chongqing and Chengdu, so as not to fall behind in the larger Chinese economic game.

In sum, the current announcements about the Shanghai FTZ are still rife with question marks, as well as significant risks. But, if followed through step by step, it marks a new major turning point in China's reform path. The aim is to use Shanghai as a testing ground to develop the kinds of institutions that China needs in order to be a fuller player in the world of global finance in addition to trade.

The author is associate professor of political science and director of the Institute of Asian Research at the University of British Columbia. bizopinion@globaltimes.com.cn