Just How Free Is Shanghai’s New Free Trade Zone?

This article is adapted, with updates, from the September 20 articleChina’s New Free Trade Zone: Silver Bullet or Stopgap Measure?

Two weeks after taking office in March 2013, China’s Premier Li Keqiang announced that Shanghai, the country’s financial capital, would be a new type of economic testing ground. China, he said, “should not be scared of opening up.” After months of speculation, the Shanghai Free Trade Zone (FTZ) became a reality on September 29. The South China Morning Post, a Hong Kong-based newspaper, claimed that Li “prevailed over all dissenting views” to green-light the project. But many Chinese have reacted to the launch with skepticism, questioning how “free” the free trade zone will really be.

Economically, at least, Li seems to be delivering on his promise. The eleven-square mile zone will reportedly allow for the full convertibility of China’s currency, the yuan, and freer flow of capital; qualified Chinese banks will be permitted to conduct offshore business, and companies can import goods into the zone before clearing them through customs. The State Council, China’s cabinet, has stated that some foreign and private enterprises will be allowed to invest freely in banks, shipping ventures, entertainment services, educational institutions, and health and medical insurers that operate in the zone.

The State Council also stated that the experimental measures are intended to deepen economic reforms and promote innovation—similar language to that used to describe the country’s first special economic zone (SEZ), which was established in the southern city of Shenzhen in 1979. China’s special economic zones were key parts of its Reform and Opening Up, a period of significant economic and political reforms that began in the late 1970s and continued through the early 1990s.

Yet after double-digit growth rates for much of the last three decades, China’s economy is now slowing. As GDP growth eased to 7.8 percent in 2012—the slowest growth rate in thirteen years—China is once again experimenting with limited reforms, perhaps in the hopes of repeating the economic miracles of the original SEZs.

Sina Weibo, a highly popular Twitter-like social media platform in China, has lit up with discussion of the developments in Shanghai. As Weibo user @BowenGuancha remarked: “The FTZ is indeed a policy bonus; it shows that economic reform has entered a new era. Its significance is no less than that of the Shenzhen Special Economic Zone at the time of its establishment.”

Shen Jianhuang, Managing Director of Mizuho Securities Asia, a Hong Kong-based financial services provider, wrote about differences between the FTZ and China’s earlier SEZs:

The significance of the Shanghai FTZ is not confined to providing a test ground for financial and trade reforms. It also serves as a pilot project for [finding efficient] legal and administrative management models. While Shenzhen spearheaded China’s fast economic growth over the past three decades, the FTZ is expected to promote domestic economic reforms with a globalized perspective.

The SEZs, along with the Reform and Opening Up policies, helped lift China out of poverty, but there is more to the story. Southern Metropolis Daily, a prestigious Guangdong-based newspaper, warned overly enthusiastic supportersto be wary of the FTZ-related hype:

When China’s period of economic and political reforms first began, there were good reasons for preferential measures and tax exemptions in the pilot zones, but their side effects are not negligible … these preferential policies are now an indispensable part of the SEZs. In the end, people have come to expect that special zones mean there will be preferential policies; worse still, special zones have devolved into a tool for asking for such policies [from the central government], which hasn’t promoted innovation or productivity, but a huge amount of low-end industry.

Some experts urged a wait-and-see approach. “Establishing the Shanghai FTZ is a good thing in principle, but at the moment, things remain very abstract,” Xu Chenggang, an economics professor at the University of Hong Kong, told news portal iFeng.com. “The outcome [of the zone] depends on how it will be run specifically. After all, most experimental zones have turned out to be failures instead of successes in recent years.”

As journalists and academics focused on the FTZ’s long-term direction, ordinary Chinese seemed more interested in the project’s immediate benefits and drawbacks, including whether the free trade zone would have free Internet. The South China Morning Post reported on September 9 that restrictions on foreign websites like Facebook, Twitter, and The New York Times would be lifted in the FTZ. Chinese Internet users shared the news on Weibo—until September 27, when the People’s Daily, a Communist Party mouthpiece, debunked the rumor: “The Shanghai FTZ is a special economic zone but not a special political zone. No one in their rational mind could imagine that the second-largest economy in the world, after over sixty years of striving, would set up a ‘political concession’ when it is thriving day by day.”

Rumors of a free Internet zone disproved, Weibo users began to criticize the authorities for using the term “openness” to describe the FTZ. As the user @ThinkFastThinkSlow wrote, “The Shanghai Free Trade Zone isn’t free!” Another user asked, “What is the point of doing all these things? The most important thing should be to improve the people’s standard of living and carry out system-wide political reforms.”

And in China’s case, the standard of living is tied to discussions about property prices, due to widespread concerns about unaffordable housing.The effect the FTZ would have on property prices thus became a hot topic. One Weibo user was quick to remark: “[This] means that housing prices are going to rise—again.”

“I think it’s gone a bit crazy,” Xi Xinlei, a Shanghai real estate agent, told the Chinese-language version of The Financial Times. “Nobody knows exactly what’s going on with the FTZ, and people are already buying up homes without even bothering to look at them first.” The article also reported that real estate prices in the vicinity of the zone had surged by twenty to thirty percent in September alone.

Premier Li has frequently emphasized the benefits of reform, stating, “Reform and opening is the only way that we can ensure people live better lives.” Yet many of China’s Internet users are skeptical that the FTZ will benefit them personally. “[The FTZ] is neither fish nor fowl. In the end, it might just become another round of real estate stimulus,” wrote one Weibo user. “If they want development, they must first change the system, then change the system, and finally, change the system.”