Shanghai Free Trade Zone begins operation

The Shanghai pilot free trade zone (FTZ) started operating Sunday, launching a test bed for the Chinese leadership's drive of deepening market-oriented reforms and boosting economic vitality.

Located on the outskirts of the city where the Yangtze River empties into the East China Sea, the zone is set to explore new ways of reducing government interventions and opening the Chinese economy wider to global investors.

Commerce Minister Gao Hucheng said building the FTZ was a crucial decision made in the new era of China's reform and opening-up. "It follows the tendency of global economic developments and reflects a more active strategy of opening-up," Gao said at the ceremony of the zone's launch.

At the ceremony, 36 companies were given licenses to operate in the zone, which covers 28.78 square kilometers.

A game-industry joint venture of Microsoft and BesTV became the first company registered in the FTZ.

Banking regulators gave the green light to 11 financial institutions including Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China) to set up branches in the zone where the most debated aspects of the country's financial liberalization are to be tested.

"Under the precondition that risks can be controlled, China will create conditions to test yuan convertibility under the capital account, market-set interest rates and cross-border use of the Chinese currency in the zone," said a blueprint for the FTZ released by the country's cabinet on Friday.

DBS China managing director Tan Teck Long regarded the FTZ's launch as a significant landmark event in the country's economic reforms, saying the zone would bring vigorous developments in trade, law, consulting and especially financial innovations.

The zone was launched as the world's second largest economy is tackling challenges that have emerged from its upgrade to a more value-added and consumption-driven model.

China's economic growth dipped to 7.5 percent in the second quarter, far below the doubt-digit growth registered in the past decade, as the cost advantage is losing edge and investment yield is declining.

Though manufacturing and investment recovery in the last two months reaffirmed Chinese economy would not encounter a hard landing, the country is still facing overcapacity and financial risks including massive government debt as well as excessive shadow banking.

Chinese leaders have been calling for economic upgrades and market-oriented reforms since taking office in March.

Comprehensive reform packages are expected to be discussed during the Third Plenary Session of the 18th CPC Central Committee in November. Analysts say the zone has been set up to test the road map of China's reforms in the upcoming decade.

"We are going to build Shanghai free trade zone as a test bed for pushing forward reforms and opening the economy wider," said Jian Danian, deputy director of the FTZ's managing authorities. "We are seeking institutional arrangements that can be copied and rolled out nationwide."