Shanghai FTZ in search of identity

City government seems hesitant to take role as a pioneer of policy for the nation

Whether Shanghai will become a new world financial center will greatly depend on how creative the city government can be with the liberties given it by the central government.

Part of the challenge is that Shanghai was not a pioneer in China's post-1970s reform. But the establishment of the China (Shanghai) Pilot Free Trade Zone last year put it at the forefront of the nation's financial overhaul.

The central government has pinned its hopes on the Shanghai FTZ to test policies for national financial reform and to better prepare China for regional free-trade frameworks, such as the Trans-Pacific Partnership.

Party chief Xi Jinping and Premier Li Keqiang have reiterated on different occasions that Shanghai should try out practices that will further the nation's integration into global trade.

But the Shanghai government has been taking a wait-and-see attitude.

After the first-round ballyhoo, the Shanghai FTZ has not yet excited entrepreneurs with any tangible breakthroughs over the first six months of its operation.

The main advantage is that foreign capital is allowed to enter certain fields such as finance, services, banking and shopping. And it is easier to register a private enterprise in the zone.

But Shanghai officials seem to be missing the bigger picture. If Shanghai wants to earn back its title as a global financial center, it should not regard guaranteeing freedom for some standard practices of international financial centers as a pivotal achievement.

Yes, the Shanghai FTZ administration published the first "negative list" in China last year, a gesture meant to cut government red tape. But the list contained more than 1,000 banned areas. Thus, paradoxically, the local government is aiming to reduce bureaucracy in a bureaucratic way.

"More troubling is that few details were given at all," the Economist magazine commented in one article about the Shanghai FTZ.

Shanghai was a world financial center a century ago, when Tokyo, Hong Kong and Singapore were less well-known.

In its quest to regain the title, Shanghai needs to catch up with the front-runners, not just be content with leading other parts of China.

If the Shanghai FTZ administration cannot acquire an international vision, the Shanghai FTZ may follow in the footsteps of the Pudong new district.

Once a desolate area east of Huangpu River, Pudong was the central government's early effort at renewal.

In the 1990s, Pudong became a local showcase with its skyscraper clusters, contributed to local economic growth and promoted several local officials to the central government.

But unlike Shenzhen - China's first special economic zone bordering Hong Kong, which was initiated in the 1980s - Pudong has not generated much spillover into other parts of China.

Fundamentally, local officials remain growth-driven, despite their pro-reform pledges. Many tend to equate the FTZ with tailor-made preferential policies in land, tax and exports.

Although the central government has stressed again and again that it will not roll out any preferential policies for any free-trade zone, it can't seem to dampen its local counterparts' itch to set up an FTZ.

About 30 provinces and cities have shown willingness to set up an FTZ, and at least 13 of them have applied for one this year. This is something similar to the mania they exhibited in the 1990s, when they applied to set up high-tech development areas and industrial parks.

Those areas and parks flourished with low taxes and cheap land. But with rising labor costs and declining exports, many have withered.

The national FTZ craze has motivated the Shanghai government, in its latest rules, to pressure the Shanghai FTZ to provide valuable lessons for financial reform in the planned three years.

Local officials believe the central government will pick up the tab with either more concrete plans or preferential policies.

Analysts believe that deepening financial reform within the FTZ and effective control over the border between it and the rest of China - to rein in speculation due to the incomplete nature of the renminbi's exchange rate reform - are central to its success.

Xia Bin, senior economist with Tianjin-based Nankai University and a counselor for the State Council, proposed that all financial sector practices should be done according to market rules and international conventions in the Shanghai FTZ.

"Otherwise, the FTZ loses its meaning," he pointed out.