City limits

Shanghai trade zone may give rest of China a kick

Shanghai's new trade zone may be a lab for financial reform. It may be a prop for the city's flagging economy. Or maybe it will just be fuel for property speculators. In fact, it can be all of these and more. But the real benefits may not be in Shanghai at all.

The 29-square-km area is rich in symbol but not yet substance. China's State Council has trumpeted the district as "an upgraded version of China's economy", with suggestions the currency will be more freely convertible, and China's tightly controlled savings rates may be relaxed. Companies are providing wish lists of services they would like to provide but currently can't, from cloud computing to selling insurance out of wholly-owned subsidiaries. Yet, while the details remain murky, what's certain is that Shanghai's new region will be more than a re-run of the export zones China launched in the 1980s.

Those combined China's cheap labour with foreign inputs like capital and components. The new zone will rely more on services where the end customer is in China, and encourage foreign companies to bring their brainpower - and their money - onshore.

Shanghai certainly needs a boost. Its GDP per capita grew just three per cent in nominal terms in 2012, according to figures from Datastream. With the government in Beijing, industry moving west and the stock market flaccid, Shanghai faces an identity crisis. Shanghai Pudong Development Bank's shares have risen 25 per cent since September 6; the benchmark share index is up five percent.

Not all participants will get what they wish for. The balance may be delicate: open the border between the zone and the rest of China too far and capital may gush out, as savers seek loopholes to broaden their investment opportunities. Leave it closed, and the new zone will just be a more northerly, less accessible version of Hong Kong.

Still, the zone's real function may be to give the rest of China a kick. Already, officials in small cities surrounding Shanghai are debating how to introduce market reforms. China needs to drive efficiency and innovation in the provinces too - after all, Shanghai accounts for only 4 percent of the national economic output. Beyond the metropolis, the fear of missing out may be a powerful driver of change.