Can FTZ lead rest of nation in reform?

The Shanghai Free Trade Zone has at last opened officially amid much positive media attention. But does this initiative really represent a major step toward a new era of reform or could it actually lead to a setback as the Chinese economy struggles to reignite the explosive growth of the past few decades?

Firmly related to the financial sector, the few details to have emerged include the marketization of interest rates and the opportunity for international trade settlements in yuan. Also to emerge are details of foreign company access to the health insurance, shipping and tourism sectors.

While this will undoubtedly lead to trade liberalization across this zone and increased foreign direct investment and foreign company involvement across the zone, it remains unclear just how the Chinese companies currently not based within the area will benefit.

For example, it may be that Chinese companies have to conduct all their business within this zone. If, on the other hand, the new, liberalized zone merely requires the setting up of a representative office within the zone, from which business can continue anywhere across China, then the impact will be quite considerable.

A key objective of any reform measure is the fillip that should result in economic development across less affluent parts of the mainland such as West and Northwest China in particular. But will some sort of trade liberalization across a relatively prosperous east coast city such as Shanghai help in this regard?

Shanghai and other East coast provinces and cities have benefited disproportionately from China's economic miracle since it began back in 1979. But it is also the case that the prioritization given to coastal provinces has also effectively erected barriers to economic growth in large parts of the Chinese mainland.

The Shanghai FTZ, therefore, could further exacerbate the economic growth gap between East and West China. Implemented on its own with no link to poorer parts of China, this FTZ may well trigger further growth within and around the designated area, but in so doing it may also raise even higher barriers for other parts of mainland China.

While the central government most definitely should be applauded for further trade liberalization, the Shanghai FTZ should also be implemented in tandem with similar initiatives or a zone, that will ring-fence the most impoverished areas of mainland China.

Further, any such free trade zone could be tied to the Shanghai FTZ where investment between zones has some sort of government backing and subsidy.

At present an insubstantial trickle-down effect has taken place from China's special economic zones and coastal provinces. Simply enabling further economic activity across the more developed areas of mainland China, therefore, is highly unlikely to lead to any greater and much-needed trickle-down effect.

It is only with direct and lasting government incentives, probably focused on West China, via some sort of special economic zone in tandem with further trade liberalization initiatives such as the Shanghai FTZ that a more solid and sustainable economic growth path can emerge.

Shanghai FTZ yes, but where is its sister Shaan-Gan-Ning equivalent?

The author is a visiting professor at the University of International Business and Economics in Beijing and a researcher at Nottingham University's School of Contemporary Chinese Studies.