BEIJING: China has officially unveiled details of its first free trade zone (FTZ) in Shanghai, shedding light on Friday on the reform path of the new leadership as it aims to transform the world’s second-largest economy.
The FTZ project, which received government approval last month, will be inaugurated on Sunday, the official Xinhua news agency reported this week.
The government will allow free yuan convertibility under the capital account on a trial basis, and test market-set interest rates and cross-border use of yuan in the zone, according to a release by the State Council, China’s cabinet.
Restrictions on foreign investment will also be eased, as regulations on operations of foreign firms and Sino-foreign joint ventures will be “temporarily adjusted” in the zone for three years from October 1, according to the details, which are largely in line with a draft plan seen by AFP earlier this month.
Economists said the contents released on Friday indicated that China will accelerate its capital account convertibility and financial sector reforms, but its ability to manage capital flows will also be tested.
“It is politically wise to conduct a pilot in a small and restricted area as the Chinese authorities intend to contain potential risks,” ANZ bank economists wrote in a research note on Friday.
“We view the ability to control capital flows as the biggest challenge for the FTZ,” the economists said, adding onshore and offshore interest rate differentials will spur capital inflows.
The free trade zone will amalgamate four existing bonded trade zones in Shanghai - China’s commercial hub - and span almost 29 square kilometres (11 square miles), according to Xinhua.
The zone is part of structural reforms that authorities have pledged to push forward to shift the economy away from dependence on big-ticket investments and more towards consumer demand as the key growth engine.
China’s economy, the world’s second largest, expanded 7.7 per cent in 2012, its slowest pace in 13 years. Growth stood at 7.7 per cent in the first three months of this year and slowed further to 7.5 per cent in the April-June period.