Shanghai Trade Zone to Open This Month as Li Tackles Reform

An opening ceremony for a Shanghai free-trade zone to test economic reforms is planned for this month, with Chinese Premier Li Keqiang set to officiate, two people with knowledge of the matter said.

The event may be on a day from Sept. 27 to 29, depending on Li’s schedule, said the people, who asked not to be identified because they weren’t authorized to speak publicly about the matter. The Shanghai Daily reported yesterday that the zone will officially open Sept. 29, citing Wang Xinkui, director of the city’s counselor’s office.

The zone may allow freer yuan convertibility, liberalize interest rates and relax restrictions on foreign investment as part of Li’s drive to sustain growth by shifting the economy toward services and consumption from investment and exports. It also pushes forward China’s goal of making Shanghai a global financial center by 2020 that was first laid out in 2009, threatening to undermine Hong Kong’s role.

“An important part of economic-system reform is financial reform,” Li said Sept. 11 at the World Economic Forum in the northern Chinese city of Dalian. “It is because it is such a complicated systematic project, it indicates China’s reform has entered a deep-water zone, or the most difficult phase.”

Investors and analysts are assessing the strength of the new Communist Party leadership’s commitment to economic changes, ahead of a November meeting to set policy. Expanding the role of markets could help to fuel growth that a Bloomberg News survey of economists shows may slow to 7.5 percent this year, the weakest pace since 1990.

Stocks Slip

The Shanghai Composite Index fell 0.9 percent yesterday, the most in a month, amid speculation that gains linked to the Shanghai plan have been overdone. Shanghai International Port Group Co. slipped 2.5 percent. The port operator has climbed 155 percent since Aug. 22, when the Ministry of Commerce reiterated that the government had approved the trade-zone plan.

Removing limits on interest rates in free-trade zones may have a significant impact on capital flows, Wu Xiaoling, a former deputy governor with the People’s Bank of China, told reporters at a conference at the China Europe International Business School in Beijing today.

Free-trade zones don’t have much real economic output, they are more a window for trading, Wu said. Restricting trials to zones such as Shanghai may encourage capital inflows seeking to exploit loopholes in institutions and regulations to conduct arbitrage, which won’t have much benefit for financial-system reform as a whole, she said.

’Wake-up Call’

The government should speed up reform with nationwide trials rather than giving certain districts special treatment, Wu said, adding that these were her personal views.

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said yesterday that the zone is a “clear demonstration of the government’s drive for reform” and a “wake-up call for Hong Kong.”

Mark Williams, a former U.K. Treasury adviser on China who is now a London-based economist at Capital Economics Ltd., said that the venture was “an experiment worth watching, but not the game-changer some believe.” He said that “successful innovations will ultimately be rolled out nationwide, but probably only after many years.”

‘Prohibited List’

Ten projects are scheduled to be announced at the opening ceremony, the people said. Thirty projects are vying to be among those disclosed at the event, one of the people said.

The government also aims to release on Sept. 15 a “prohibited list” that will outline what kinds of foreign investments won’t be allowed in the zone, the people said. This list, which was mentioned by the Ministry of Commerce in a statement released last month about the zone, would help simplify approvals for foreign projects, according to Philip Cheng, a Shanghai-based partner at the law firm Hogan Lovells International LLP.

The Shanghai city government referred questions about the event to the State Council, China’s cabinet, which is headed by Li. The State Council Information Office didn’t immediately respond to faxed questions seeking comment.

A draft plan for the area seen by Bloomberg News included expanded opportunities for foreign companies in industries from banking to health insurance.

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