Shanghai trade zone may give rest of China a kick
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Shanghai‚Äôs new trade zone may be a lab for financial reform. It may be a prop for the city‚Äôs flagging economy. Or maybe it will just be fuel for property speculators. In fact, it can be all of these and more. But the real benefits may not be in Shanghai at all.
The 29-square-kilometre area is rich in symbol but not yet substance. China‚Äôs State Council has trumpeted the district as ‚Äúan upgraded version of China‚Äôs economy‚ÄĚ, with suggestions the currency will be more freely convertible, and China‚Äôs tightly controlled savings rates may be relaxed. Companies are providing wish lists of services they would like to provide but currently can‚Äôt, from cloud computing to selling insurance out of wholly owned subsidiaries.
Yet while the details remain murky, what‚Äôs certain is that Shanghai‚Äôs new region will be more than a re-run of the export zones China launched in the 1980s. Those combined China‚Äôs cheap labour with foreign inputs like capital and components. The new zone will rely more on services where the end customer is in China, and encourage foreign companies to bring their brainpower – and their money – onshore.
Shanghai certainly needs a boost. Its GDP per capita grew just 3 percent in nominal terms in 2012, according to figures from Datastream. With the government in Beijing, industry moving west and the stock market flaccid, Shanghai faces an identity crisis. Shanghai Pudong Development Bank‚Äôs shares have risen 25 percent since Sept. 6; the benchmark share index is up 5 percent.
Not all participants will get what they wish for. The balance may be delicate: open the border between the zone and the rest of China too far and capital may gush out, as savers seek loopholes to broaden their investment opportunities. Leave it closed, and the new zone will just be a more northerly, less accessible version of Hong Kong.
Still, the zone‚Äôs real function may be to give the rest of China a kick. Already, officials in small cities surrounding Shanghai are debating how to introduce market reforms. China needs to drive efficiency and innovation in the provinces too – after all, Shanghai accounts for only 4 percent of the national economic output. Beyond the metropolis, the fear of missing out may be a powerful driver of change.