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Lotus Yuen

China’s New Free Trade Zone: Silver Bullet or Stopgap Measure?

View from the observation deck of the Shanghai World Financial Center (Via Flickr/かがみ~)
View from the observation deck of the Shanghai World Financial Center (Via Flickr/かがみ~)

On August 22, China’s State Council, the country’s highest executive body, signed off on the establishment of a 28-square-kilometer Free Trade Zone (FTZ) in Shanghai, which will open on September 29. Detailed guidelines on the management of the FTZ, however, will not be released until the end of this year at least.

The FTZ will be the first official free trade zone in mainland China. Premier Li Keqiang is rumored to have “prevailed over all dissenting views” to promote the FTZ, which is meant to bring Shanghai — one of the largest metropolises and financial hubs in China — back into focus for both domestic and international media.

According to the guidelines released, the FTZ will consist of four areas under the special supervision of China’s customs agency, and it will allow and promote more private capital in the banking sector, as well as freer cross-border currency flow

These measures are aimed at increasing the “openness” of the Chinese market, so as to attract foreign capital and bolster China’s slowing economic growth. Because of the emphasized “openness,” commentators have compared the FTZ to the Special Economic Zones (SEZs) China established in 1979, which have been thought to mark the beginning of China’s Reform and Opening up Policy.

Sina Weibo, a highly popular Twitter-like social media platform in China, was abuzz with discussion of the developments. As Weibo user @博闻观察 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.自贸区确是制度红利,标志着经济改革迈入新的阶段,不亚于当年南巡之深圳特区!

User @袁老学哲 commented, “The most effective way to deal with China’s economy is to boost its domestic demand. Only when domestic demand is increased will China reverse the current economic trend and avoid being besieged by the West. [Promoting the FTZ] shows that the government has become aware of the core cause of the problem, which is fortunate.中国的最大突破口在内需.只有把内需搞上去了,才会扭转经济围堵,美欧搞的那些东西就会不攻自破。好在ZF已经意识到问题之所在,

Shen Jianhuang, managing director of Mizuho Securities Asia, wrote:

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.上海自贸区的意义绝不仅在于推行金融、贸易改革试点,其对法律、行政管理模式的探索,与深圳特区有异曲同工之处。深圳为中国开创三十年经济快速增长;而上海自贸区有望以更国际化的视野推动国内经济改革

While a natural comparison, the idea that the FTZ is a modern SEZ falls flat in some ways. A brief history of China’s SEZs reveals how different the two entities are. The SEZs were opened in the early 80s, not long after the end of China’s infamous Cultural Revolution, a period of ideological and class struggles that saw economic development grind to a halt. The catastrophic ten-year period left China’s central government with a serious financial deficit and an economy on the verge of collapse.

At that time, the southern Chinese city of Guangdong, which neighbored the then-British-ruled Hong Kong and was located far away from the ideologically-oriented Beijing, was comparatively open-minded about reforms. Having witnessed the success of Hong Kong, the official in charge of Guangdong –Xi Zhongxun, the father of current Chinese President Xi Jinping – proposed the idea of establishing a “special zone” to Beijing leadership, an idea that was later approved by leader Deng Xiaoping.

To bring more conservative officials on board, Deng renamed the area a “special economic zone,” emphasizing that it was meant to allow economic reforms and economic reforms only. In April 1979, the Shenzhen SEZ was established; China now has seven SEZs in total.

There is no denying that the SEZs, along with the Reform and Opening up policy, have lifted China out of poverty and backwardness. But a good-or-bad, black-or-white view of the developments would be insufficient. The Sothern Metropolis Daily, a prestigious newspaper based in Guangdong, has warned overly enthusiastic supporters to be wary of the FTZ-related hype:

During the initial stages of the Reform and Opening up, there were good reasons for certain preferential measures and tax exemptions in the pilot zones, but their side effects are not negligible…As time has gone by, these preferential policies have become an indispensable part of the SEZs In the end, the mindset that  ‘special zones = preferential policies’ is solidified; worse still, special zones have devolved into a tool for asking for such policies [from the central government], leading not to an increase in innovation abilities or productivity but to the existence of a huge amount of low-end industry.改革开放初期,试点地区会获得一些特殊优惠政策、税收减免的支持,这样的做法在特定的历史背景下有其合理性,但副作用亦不可忽视。久而久之,优惠政策变成了特区赖以生存的必备条件,最终,“特区等于优惠政策”的模式被固化,特区甚至变为“要政策”的工具,导致大量低端产能的形成,创新能力却没有得到提升,更不能转化为生产力。

As the media and academia have focused on the macro-direction in which the FTZ would and should be going, ordinary Chinese seem to feel more interested in the development’s immediate benefits and drawbacks.

The first thing that came to mind for many was, unsurprisingly, property prices. In fact, skyrocketing housing prices are a sore point for most Chinese. User @清香的色彩 was quick to remark on this effect: “[This] means that housing prices are going to rise—again.意味着房价又要上涨咯。

Many also shared a concern mentioned by user @经常间接性思考的猫 : “May I ask, how can one buy milk powder in the FTZ? Do we need to pay taxes if bringing goods out of the zone?请问如何买奶粉 货物出自贸区进入国内不是还要交关税吗” It is not uncommon to see people comparing the FTZ to Hong Kong, which has long been known as an international free-trade harbor where mainland Chinese have flocked to buy international imports at reduced prices.

Other Weibo users were critical of the term “openness” employed by the authorities when describing the FTZ. User @枕琴听水韵 asked, “Can the Internet enjoy such openness? Can we run [political] campaigns there?网络开放吗?能竞选吗?” Likewise, user 沈渔 mocked, “Can we access Facebook, YouTube or Twitter within the FTZ?上海自贸区可以上facebook youtube twitter吗?” User @李斯的清爽夏日三世 went much further, saying, “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.弄这么鸡巴玩意有意思嘛,还是政治体制改革和改善民生最重要吧

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Lotus Yuen

Lotus Yuen is a graduating student at Beijing Foreign Studies University, and was born and raised in Guangzhou. Currently, she is an editorial intern at Ifeng.com and has published several news articles in the Southern Metropolis Daily, New Business Magazine, and Hong Kong Independent Media. She is particularly interested in sociology and world politics.
  • Paul Schoe

    I am surprised tabout the connections that people make with this new Free Trade Zone. A Free Trade Zone is particularly focused on trading with other countries. Yet, as @袁老学哲 says: “The most effective way to deal with China’s economy is to boost its domestic demand” and even though the FTZ is focused on international trade and investment, he then concludes “[Promoting the FTZ] shows that the government has become aware of the core cause of the problem, which is fortunate“, which seems to be the conclusion of many of the commentators.

    I wonder if there are no more effective ways to boost domestic demand then setting up a Free Trade Zone that is focused on dealing with other countries.
    (that does not mean that I don’t see benefits of a craddle in which the government can test out new policies, but that is another argument then ‘boosting domestic demand’, something that would help China for decades to come)

    • blaine

      attracting fdi has nothing to do with boosting consumer demand. its all about getting more hot money to prop up the investment economy. specifically shanghai’s investment economy. which diminishing returns will soon no longer accurately describe. fdi has been volatile and the equity markets have been taking hits after fdi number misses. they should put one of these in an area that actually needs it. like li keqiang’s ghetto province of anhui. the emperors always forget where they come from.

  • Tebe

    In the Shanghai FTZ, the Great Firewall is still in force.