SHANGHAI – China launched a free trade zone in the commercial hub of Shanghai on Sunday, state media reported, with the project seen as a testing ground for much-needed reforms in the world’s second-largest economy.
The zone, which covers 29 sq. km, “started operating Sunday,” the official Xinhua News Agency said, adding that it is “a test bed for the Chinese leadership’s drive of deepening market-oriented reforms and boosting economic vigor.”
Reforms in the zone will be closely watched as a key test of China’s ability to make long-pledged structural changes as it attempts to shift its economic model in the face of slowing growth.
The government will allow free yuan convertibility under the capital account on a trial basis, according to a statement released by China’s State Council, or Cabinet, on Friday.
Market-set interest rates, seen by analysts as a key reform for China’s economy, will also be trialed, according to the statement.
Restrictions on foreign investment will be eased inside the area, which will also loosen controls on 18 service sectors ranging from finance and shipping to culture services.
Excitement over the launch has boosted stocks of Shanghai-based firms and spurred a rally in home prices and land costs in areas neighboring the zone in the past few weeks, state media have reported.
But analysts have adopted a cautious approach.
“It shows that the new government is keen on making reforms,” Stefan Sack, vice president of the European Chamber of Commerce in China, said in an interview. “We have to see what kind of regulations will really be implemented there.”
But he added that “a free trade zone in Shanghai alone will not change how business is done in China.”
Unlike with previous special economic zones launched by China’s government, the Shanghai free trade zone’s (FTZ) emphasis on the service sector, rather than export-oriented manufacturing, has been welcomed by economists.
Kenneth Jarrett, president of the U.S. Chamber of Commerce in Shanghai, said the zone’s plan shows a clear emphasis on service sectors.
“It suggests that the government does plan to have the service sector as a major component of what the FTZ will do,” he said. “Our members are eager to find out more. But there is a sense that the zone could offer real opportunities for our member companies.”
The project has been pushed by Premier Li Keqiang, who took office in March.