Shanghai Free Trade Zone Still Nowhere Near “The Zone”

Dr. Jean-Marc F. Blanchard's picture

The launching of the Shanghai Free Trade Zone (SFTZ) approximately one year ago generated considerable excitement. Months before its launch, Chinese media began to talk of an area that would be “grander and bolder than anything that has ever been conceived.” As far as foreign investors were concerned, the SFTZ’s marquee idea was a “negative list,” which essentially let in foreign investors automatically unless otherwise prohibited.

Foreign companies also salivated at the prospect of greater opportunities to provide financial services, professional services, healthcare and eldercare, education and training, and technological services like data storage. Foreign businesses further were excited about prospects for interest- and exchange-rate liberalization. The SFTZ offered more mundane reforms such as simplified customs procedures, too. To date, many things have transpired in regards to easing business establishment, opening various sectors to foreign investors, and streamlining the negative list. More noteworthy, though, is how much remains to be done. The negative list remains too long, full currency and interest rate liberalization is not close to being achieved, and some SFTZ “privileges” do not differ from rights firms have elsewhere. Nevertheless, some remain unworried given the continuing, prominent support of Chinese top leaders for SFTZ progress and China’s past practice of implementing reforms incrementally. One might argue, too, that a number of “one-off” events (President Xi Jinping’s fight against corruption, international crises, and China’s current focus on preserving economic growth) have disrupted SFTZ progress. However, it is not clear that SFTZ progress will accelerate even in the absence of such one-off events. Meaningful reforms will be complicated, costly, and, in some cases, economically and politically risky. Special interest groups still exist to challenge reforms. Lastly, there is no sense of crisis supporting the push for radical reforms. It may be a while before the SFTZ gets “in the zone.