Establishing an experimental free trade zone (FTZ) in Shanghai is in line with new trends in the global economy, marks a great leap forward in China's reform and opening-up, and will help China meet the new challenges of globalization, according to a report by Xinhua News Agency on July 3.

Centering around the Yangshan Deep Water Port in Pudong New Area, the Shanghai FTZ combines the current four bonded zones in Shanghai: the Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone. It could open as soon as the end of this year, according to media reports.

Track record

The central government picked Shanghai as it has a track record of being at the vanguard of China's economic reform, being China's business and financial center.

"Shanghai has a history of opening to the outside world and has experience in operating sizable ports like Waigaoqiao," Lian Ping, chief economist at Bank of Communications, told the Global Times.

Shanghai is strategically located in the middle of China's east coastline, covers the Yangtze River Delta region and faces the Asia Pacific region, said Wang Liang, deputy director of the Committee of Economy of Shanghai Municipal Committee of the Chinese People's Political Consultative Conference.

Compared to other Chinese cities, Shanghai has better social and economic systems, Wang noted. "From its traditions of opening to the world, Shanghai's commerce market enjoys a higher credibility in China," he told the Global Times.

Breakthrough

In November 2012, the Standing Committee of Shanghai Municipal People's Congress commissioned a study into setting up an FTZ that would be on a par with international standards. The Shanghai municipal government also put establishing a trial FTZ in Pudong into this year's government work report.

At the end of January, Shanghai submitted applications to the central government to set up the trial FTZ, according to the Ministry of Commerce website. However, not much progress was made until Premier Li Keqiang visited Shanghai's Waigaoqiao port in late March, during which Li voiced his support for a trial FTZ in Shanghai.

"Shanghai has been considering the idea since the late 1990s, but the central government has never officially given the nod," said Yao Xinbao, a professor of journalism at Shanghai Jiao Tong University and a former journalist in Shanghai. "Giving Shanghai the go-ahead shows the new Chinese leadership is determined to use the FTZ to help the city become an international finance center," Yao told the Global Times. Shanghai strives to be a global economic, financial, trade and shipping center by 2020.

Testing ground

Wang Liang said Shanghai's FTZ will be a testing ground for China's economic development. "Having an FTZ is not about getting preferential policies from the central government; it is part of China's further reform strategy," Wang said, a viewpoint that is echoed by Lian Ping.

As such, the regulations governing trade in the zone will, once tested, likely be slowly rolled out across the whole of the country.

"The zone is expected to gradually expand to Pudong, then Shanghai, then eventually the whole of China in a few years," Chen Bo, an international economics professor at the Shanghai University of Finance and Economics and deputy director at the Research Center on Shanghai Free Trade Zone, told the Global Times.

Because of the importance of the FTZ to China's future development, the central government is being cautious by starting with a small area in Shanghai, Chen said.

Wang said with its strong economic foundation, Shanghai has the ability to be an incubator for financial innovation, which other cities can then emulate.

Treading carefully

According to Chen, the Shanghai municipal government is putting together regulations for the FTZ, with details expected to be released in three months.

Shanghai Party secretary Han Zheng said during the fourth meeting of the Shanghai Committee of the Communist Party of China held on July 12 and 13 that, "Speeding up the building of the China (Shanghai) free trade trial zone is the most important work for Shanghai in the second half of the year."

"Shanghai is under a lot of pressure right now and is treading very carefully as everyone is watching closely," a source who has attended municipal government meetings said. "Han Zheng asked officials to talk less and work hard on this project."

A look at FTZs around the world

An FTZ is a designated area within which goods are registered but not inspected by customs, allowing a free flow of commodities and services. It can be built within a country or straddle countries to eliminate tariffs and trade barriers.

Shannon Free Zone, Ireland

Originally established in 1959 to develop the local aviation industry with tax incentives for businesses, today about 110 companies in different industries have set up shop in the 2.43 square-kilometer zone, including multinationals such as Intel and GE Capital.

Colon Free Trade Zone, Republic of Panama

The 2.4 square-kilometer Colon Free Trade Zone has been in operation since 1948, with the aim of modernizing the economic service sector in Panama and streamlining regional commerce in Latin America with a comprehensive transportation system such as six airports, five ports, highways and the Panama Canal.

Busan-Jinhae Free Economic Zone, South Korea

The 83.1 square-kilometer zone in Busan was built 10 years ago. By 2020 the zone will be equipped with a new port, industrial parks, business districts, and facilities to serve the international community like schools and hospitals.

Hong Kong

The city has become an international financial and commercial center because of its status as an entrepot where trade barriers on the import and export of goods are eliminated. As one of the most open financial markets in the world, Hong Kong has no restrictions on capital flow and foreign exchange.

Singapore

With only 707 square kilometers of land, the city state boasts nine free trade zones that handle seaborne or airborne cargo such as Brani Terminal and Jurong Port. Good & service tax (GST) exemption for companies is offered within the zones.