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The Shanghai Free Trade Zone

The bold launch of the Shanghai Free Trade Zone in October was an attempt to move away from the traditional economic model of infrastructure spending and exports and towards a more flexible approach in the style of Hong Kong’s free port system. Easing the restrictions on foreign investment within the zone is designed to spur economic growth. But what impact has the introduction of the FTZ had on industry and the population as whole?

International Interest

The FTZ has been heralded by China as a pioneering new business model that will boost economic growth, kick-start wider reforms and encourage foreign investment. Allowing currency convertibility, permitting markets to set their own interest rates and relaxing controls on the types of industries allowed to trade are measures designed to attract new business investment. Curiosity from businesses has been high, with around 1400 companies registering interest within the first two months of the zone’s launch. Although the majority of these are currently domestic rather than foreign, there are signs that this will change. The approval process will be streamlined to make it easier for overseas companies to gain a foothold in the zone.

The most significant impact will be on the financial industry, but other sectors are likely to benefit, including shipping and commercial firms, professional services such as legal firms and travel agencies as well as cultural interests. Making reforms such as the convertibility of the yuan within a small controlled zone will allow authorities to assess their impact before rolling out changes across a wider area. However, strong firewalls will be needed in order for the scheme to be workable, and currently foreign banks are cautious about investing, given the lack of clear regulations. However, broadly speaking, the mood is positive, with many seeing this as the first step towards essential liberalisation and a new relationship between China and the rest of the world.

Impact on the Population

A shift in the types of industry China wish to focus on will lead to increased employment opportunities in the financial and service sectors as the nation moves away from its reliance on manufacturing. Incentives are being offered to overseas returnees to set up businesses in the zone, bringing new skills and knowledge back into the country. A further significant impact on the population involves changes to the healthcare system. Previously, there has been a low uptake of private healthcare insurance in China. Individuals have instead relied on government insurance unless their circumstances change, such as when choosing where to give birth.

However, as foreign health insurers will be permitted to operate in the zone, this sector is likely to undergo significant liberalisation and is expected to show substantial growth, particularly given China’s aging population and growing need for medical insurance. As an additional consequence, the expected influx of Western employees is likely to prompt the building of new WFOE (wholly foreign owned enterprise) hospitals, giving the population further healthcare choices.

Despite being launched to great fanfare, so far the FTZ appears to be a modest rather than resounding success. There are still restrictions on the types of project that are permitted in the Zone, with the authorities reserving the right to take action to maintain the status quo or pursue further liberalisation should this be required, leaving businesses unsure where they stand.

However, legislative clarification will hopefully be forthcoming in the near future. With the mood still optimistic within the zone and plenty of companies interested in being part of this new economic model, it is possible that the FTZ could provide the economic boost that China needs.

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