HONG KONG—Last month, as the super-typhoon Usagi lurched toward Hong Kong, local meteorologists warned that it could be the most destructive storm to hit the territory in 30 years. Residents braced themselves for the worst, and at the last minute, Usagi veered northward, sparing the tense city.
There were echoes of Usagi one week later in Hong Kong when Gao Hucheng, China’s Commerce Minister, presided over the launch of the much-hyped Shanghai Free-Trade Zone (FTZ). Following news in August that Beijing had approved the zone with the full backing of Premier Li Keqiang, there had been growing speculation in Hong Kong that the former British colony’s unique role as China’s offshore financial center was in jeopardy.
But just as with Usagi, the threat to Hong Kong posed by Li’s Shanghai showcase for “an upgraded Chinese economy” disappeared at the last minute. Instead of the rumored market-influenced interest rates, corporate income tax concessions, freer convertibility of the renminbi and the opening of China’s capital account—which would have unleashed a tidal wave of Chinese investment into overseas markets—the zone opened under cautious new regulations that were short on details and long on restrictions. The fact that Li himself was not in attendance at the opening ceremony did not go unnoticed.
Now that the 11-square-mile FTZ—which includes the tariff-free areas of Yangshan Port, Waigaoqiao Bonded Zone and Pudong Airport—is open for business, there are more questions than answers. The two big questions are: Will the zone fulfill its potential as a testing ground for bold financial reforms for the rest of the country? And, will Shanghai ever be a global financial center on par with Hong Kong?
As it stands now, the FTZ’s short-term status is unclear. An unnamed government source cited in a South China Morning Post article published prior to the zone’s launch suggested that unnamed regulators seeking to maintain their grip on the financial sector of the world’s second-largest economy were impeding progress on the zone. Additionally, Li had already run into opposition from the country’s banking and securities regulators in his efforts to secure approval for the FTZ in the first place. Those same regulators and other powerful players may now be creating difficulties for Li’s Shanghai plans.
Willy Lam, a professor at Chinese University of Hong Kong and an expert on the inner machinations of the Chinese government, said Li had already dealt with a lack of enthusiasm from the People’s Bank of China (China’s central bank), the State Administration of Foreign Exchange, and the “big four” state-owned banks (Bank of China, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China) in getting the Shanghai FTZ approved.
Lam said that with the Third Plenary Session of the current Communist Party of China Central Committee leadership scheduled for November, the pressure is on Li (who as premier is responsible for the economy) and President Xi Jinping to bring a cohesive vision to the meeting, where economic reforms are traditionally introduced.
“The plenary session will be the first major statement regarding economic reforms from the Xi Jinping-Li Keqiang leadership,” Lam said. “They need to have something to show the world that they are pushing forward with reforms.” What that will be, however, remains to be seen.
The return of Hong Kong to China in 1997, after 155 years of British colonial rule, was a turning point in China’s recent rise as a global economic power, and the territory has been useful to Beijing as an offshore finance center. While its metamorphosis into Asia’s top financial hub was facilitated by the low-tax, pro-business regulatory environment and rule by law established by the British, the Communist Party’s victory in the Chinese civil war in 1949 also played a key, albeit indirect, role. Following the establishment of the People’s Republic, foreign firms and businesspeople—including the Chao, Koo, Pao, Tsao and Tung shipping families—fled Shanghai en masse for Hong Kong, many on their own boats.
Shanghai’s revival is, in many ways, a metaphor for the rise of China itself, but major obstacles to the central government’s vision of the city joining the ranks of New York, London and Hong Kong by 2020 remain. The Shanghai bourse hovers around the middle of the world’s top 10 stock exchanges in terms of market capitalization, but it and many other aspects of China’s finance sector are hindered by strict capital controls. A lack of confidence in Shanghai’s stock market (and its counterpart in Shenzhen) is a major issue and a primary symptom of the financial market shortcomings that are driving a problematic housing bubble.