21 January 2019
Shanghai is intensifying efforts to implement financial reforms. Photo: Bloomberg
Shanghai is intensifying efforts to implement financial reforms. Photo: Bloomberg

POLICY WATCH: Shanghai FTZ pledges major progress on key reforms

Shanghai’s newly established free trade zone will help the city fulfill its dream of becoming the country’s premier financial hub by pushing forward major economic reforms and attracting foreign investment.

However, its contribution to the nation’s economy will be minimal in the short term, experts say.

Yang Xiong {楊雄}, the city’s mayor, has pledged to make major progress on key financial reforms in the city’s pilot free trade zone this year, including full convertibility of the yuan, in a bid to serve the city’s purpose of being a “pioneer” in the national reform and opening-up drive.

The world’s second largest economy expanded 7.7 percent last year, the same pace as in 2012 but much slower than the average 10 percent growth in the past decades, as the nation pursues its economic restructuring amid a sluggish export environment.

To become the nation’s showcase for financial reforms, Shanghai is intensifying efforts to pursue opening-up initiatives, Yang said. Among those on the top-priority list are convertibility of the yuan under the capital account, cross-border renminbi settlement and interest rate liberalization.

China keeps a tight rein on its capital account, including foreign direct investment, on worries that unhampered capital flows could harm the economy. Restrictions on the convertibility of the renminbi are also hampering Shanghai’s efforts to compete with other global financial centers such as New York and London. Meanwhile, the nation has allowed banks to set their own lending rates, but still sets the deposit rates by administrative order.

Reforms in these areas will increase the role of market forces in the economy, and that is why Shanghai’s experiments in financial innovation through its free trade zone will step up the pace of the nation’s opening-up efforts.

For example, the free trade zone is setting up a mechanism that will allow individuals to make investments abroad and companies to borrow money abroad. This will hasten the full convertibility of the yuan.

But as the free trade zone is still under a pilot scheme, economists do not expect it to contribute too much to spur the nation’s economic growth. The government may still need more time to build a firewall between the free trade zone and the rest of the country in terms of economic policies.

Yang said Shanghai aims to achieve an economic growth rate of 7.5 percent this year, the same as the target for 2013 but a slowdown from the expected 7.7 percent expansion last year.

“Shanghai will pursue innovation-driven growth as well as economic transform and upgrading,” Yang said.

– Contact the reporter at [email protected]



EJ Insight writer

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