Shanghai free trade zone begins operation

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The Shanghai pilot free trade zone (FTZ) started operating on Sunday, launching a test bed for the Chinese leadership's drive of deepening market-oriented reforms and boosting economic vitality.

At a ceremony held to mark the zone's launch, Shanghai Party chief Han Zheng handed a license to Microsoft Corporate Vice President Ralph Haupter.Microsoft and BesTV built a game-industry joint venture, the first registered company in the FTZ. Other 35 companies were also given licenses to operate in the zone, which covers 28.78 square km.

Located on the outskirts of the city where the Yangtze River empties into the East China Sea, the zone is set to explore new ways of reducing government intervention and opening the Chinese economy more widely to global investors.

Commerce Minister Gao Hucheng said building the FTZ was a crucial decision made in the new era of China's reform and opening up. "It follows the tendency of global economic developments and reflects a more active strategy of opening up," Gao said at the ceremony.

A blueprint of the FTZ released on Friday charts over 90 policies concerning five major areas. The country is to speed up transforming its government functions, ease restrictions on foreign investments, facilitate international trade by further opening the service sector, deepen financial reforms and improve regulatory and taxation systems.

Banking regulators gave the green light to 11 financial institutions including the Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China) to set up branches in the zone, where the most debated aspects of the country's financial liberalization are to be tested.

"Under the precondition that risks can be controlled, China will create conditions to test yuan convertibility under the capital account, market-set interest rates and cross-border use of the Chinese currency in the zone," said the blueprint.

DBS China managing director Tan Teck Long described the FTZ's launch as a significant milestone for the country's economic reforms, saying it would bring vigorous developments in trade, law, consulting and especially financial innovations.

"The opportunity here is the right of participation," said David Wu, senior partner at PricewaterhouseCoopers. "The Chinese yuan, a controlled currency, is on the track of liberalization. And this currency is linked with China, a booming economy. So there must be great opportunities."

The zone was launched as the world's second-largest economy is tackling challenges that have emerged from its upgrade to a more value-added and consumption-driven model.

China's economic growth dipped to 7.5 percent in the second quarter of 2013, far below the doubt-digit growth registered in the past decade, as the cost advantage is losing edge and the investment yield is declining.

Though recovery in manufacturing and investment in the last two months has reaffirmed that the Chinese economy will not encounter a hard landing, the country is still facing overcapacity and financial risks including massive government debt as well as excessive shadow banking.

Chinese leaders have been calling for economic upgrades and market-oriented reforms since taking office in March.

President Xi Jinping said in July China must deepen reforms in major areas with "ever more political courage and wisdom" to surmount the institutional barriers that are restraining growth.

Premier Li Keqiang said at the Summer Davos Forum earlier this month that China's modernization will not be accomplished without reform, nor will it be achieved without opening up, citing the Shanghai FTZ as one of the new ways to open the country more widely to the outside world.

Comprehensive reform packages are expected to be discussed during the Third Plenary Session of the 18th CPC Central Committee in November. According to analysts, the zone has been set up to test the road map of China's reforms in the upcoming decade.

"We are going to build the Shanghai FTZ as a test bed for pushing forward reforms and opening the economy wider," said Jian Danian, deputy director of the FTZ's managing authorities. "We are seeking institutional arrangements that can be copied and rolled out nationwide."

Regulation over the service sector has been significantly relaxed in the FTZ as China is striving to nurture service to be its economic driver.

Foreign companies will be permitted to conduct "a portion of specific types of telecommunications value-added business on condition of ensuring information security," according to the blueprint.

Foreign companies in the zone can establish call centers, provide Internet information and software technology services.

They are also allowed to produce and sell video game gadgets in China if the content passes censorship. Entertainment agencies will be allowed to solely provide performance brokerage in Shanghai.

Foreign companies may partner with Chinese enterprises on education and vocational training, provide healthcare insurance services and establish independent medical institutions.

In the FTZ, goods can be imported, processed and re-exported without the intervention of customs authorities.

Foreign investors will be given easier access and greater openness and flexibility.