Currently, the side effects of reforms over the past 30 years are becoming more and more apparent in China. High levels of withdrawal of foreign investment from the mainland are slowing the economy. There is also hesitation from the new investments coming in. There are questions over the premature "Shanghai Free Trade Zone", and whether it can lessen embarrassment. Will it stop China being marginalized from the Trans-Pacific Partnership (TPP)? Can the establishment of the "Shanghai Free Trade Area" revive China's economy? Who is the biggest beneficiary of this trade zone? Let's take a look at our expert's analysis. In late August, the Chinese Communist Party's (CCP) State Council approved the establishment of 29 square kilometers of a "Shanghai Free Trade Area" (FTA). Stocks of "Shanghai International Port Co., Ltd." have soared to more than 130%. According to market speculation, other coastal cities are also expected to set up similar "free trade zones". Tianjin Port's share price rose by 30%. The "Shanghai Free Trade Area" pilot is expected to result in financial deregulation. "Shanghai Pudong Development Bank" shares rose by 30% since last Thursday. The Wall Street Journal reported that it's very strange that rumors drive trading results in Shanghai Stock. The article also said that it is not only capital controls and unpredictable volatility that reduce Shanghai's attractiveness. It is also weak rule of law, poor corporate governance and other systemic problems. Investment in Shanghai is overhasty. There are only three paragraphs in the official announcement. The announcement emphasized that the project will include furthering the scope of business services. It aims to open financial sector innovation in free trade area. Of all the supporting measures in constructing the Shanghai FTA, the most attractive one is RMB free exchange under capital account. Xie Tian, Professor at Aiken Business School, University of South Carolina: "We can imagine that RMB free exchange under capital account may bring a duel system in the exchange rates. It may increase rent-seeking, as well as corruption within the CCP officials. It may also result in the real estate bubble bursting, if RMB free exchange occurs outside the FTA. Historically, Southeast Asia and other developing countries have all tried market-oriented exchange rates. This takes place at certain stages of economic development. They amass huge debts and the debt bubble collapsed during the process of opening. In Japan, exchange rate liberalization lead to the bubble rising and collapsing. The euro can't survive from subprime crisis and can't be matched with the U.S. Dollar The "Trans-Pacific Partnership" and "US-EU free trade zone" (TTIP) will occupy more than 80% of global GDP. With economic globalization, neither of the two trade zones attracts China. Some commentators believe that the "Shanghai Free Trade Zone" may earn extra points for China in the "Trans-Pacific Partnership" (TPP) negotiations. Xie Tian: The "TPP is an international project, not a US or Shanghai one. RMB being freely tradable in the Shanghai FTA will certainly benefit public opinion. You can tell that RMB being freely convertible is an experiment or pilot." Xing Houyuan, Vice President of the International Trade and Economic Cooperation Research Institute, commented. China is encountering many obstacles and difficulties in the multi-lateral trading system. There has been no new improvement in Doha negotiations. China is being marginalized in the TPP negotiations. There is more competition in the use of foreign investment within other developing countries. The advantage of the cost element is increasing in some countries and decreasing in China. There have been signs of capital being transferred out of China. Wu Huilin, Taiwan China Economic Research Institute researcher: "There must eventually be stable and safe rules for a business environment. The political and economic environment should be better than other countries. But China's economy is declining. In my opinion, it's impossible to save China's economy if everything depends on Shanghai." Some people even believe Shanghai could become a second Shenzhen. They think it could bring China an economic miracle again. Wu Huilin thinks that Shenzhen has taken advantage of cheap labor and cheap land. However, it has sacrificed the environment and resources, to obtain a short-term improvement. In the 1950s, Khrushchev, former leader of the Soviet Union, also took this approach, but caused the economy to collapse. Wu Huilin: "Side effects have occurred. Actually, they shouldn't pursue economic growth any longer. Li Keqiang has said the same after taking office. However, it is no good for them in the short-term. The economic bubble is getting serious now, and they are in a dilemma situation. I still hoped it was just short-term pains, and that it doesn't run into a collapse."

• published: 17 Sep 2013
• views: 4