Expanded area will provide more space for experimenting with financial sector reform

The expansion of the China (Shanghai) Pilot Free Trade Zone has been approved, the State Council announced on Monday, a move that will boost the FTZ's role as a testing ground for financial and trade policy reforms.

Shen Xiaoming, director of the administration committee of the Shanghai FTZ, said the zone will aspire to the "highest level of opening-up".

The FTZ will explore new policies to facilitate investment and trade, he said, and drive full yuan convertibility under the capital account.

The zone's expansion will give it more opportunities to develop higher added-value trade in both merchandise and services, analysts said.

The zone, now covering 28.78 square kilometers, will expand to 120.72 sq km by incorporating and unifying the existing bonded zone in Pudong, the city's central business district, with three other bonded zones in Lujiazui in the financial district and two development districts.

The cabinet has also approved plans for three experimental FTZs in Guangdong and Fujian provinces and the city of Tianjin.

Given Shanghai's rich experience in financial reform and role as a financial center, the FTZ can help facilitate financial market opening-up and trade by other FTZs, said Li Shanmin, director of Sun Yat-sen University's Institute for Free Trade Zone Research.

Post-expansion, the Shanghai FTZ's boundaries will exceed those of the current bonded areas. That should disprove the idea that FTZs are simply a different kind of bonded area, analysts said, and underscore the Shanghai FTZ's role in promoting China's economic transformation as it seeks to rise up the value chain.

The Lujiazui financial district, covering 34.26 sq km, is a national financial and trade hub. The Jinqiao development district (20.48 sq km) and Zhangjiang High-tech Park (37.2 sq km), which are included in the expanded FTZ, are national-level industrial development districts.

The expansion is not just a physical one; it is also an enlargement of the FTZ's industrial and policy roles. By including Zhangjiang and Lujiazui, the authorities have signalled that there will be more focus on advanced, knowledge-intensive manufacturing, services, investment and trade, according to Tony Su, analyst and industrial development specialist with realty firm DTZ China.

The expanded FTZ will be home to 58,000 enterprises, compared with some 20,000 now, giving the city more opportunity to carry out financial reforms and conduct stress tests, said Zheng Yang, head of the Shanghai Financial Service Office.

"To improve functions for offshore businesses will be a top priority of future reforms of Shanghai's FTZ. Such improvement is becoming an important issue for multinational corporations seeking to integrate their resources onshore and offshore, as well as for local firms that are eager to raise funds in overseas markets," said Jian Danian, deputy head of the administration committee of the Shanghai FTZ.