Shanghai’s FTZ is not a threat

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The new free-trade zone in Shanghai is much more likely to invigorate Hong Kong as a financial sector than threaten it.

The creation of a free-trade zone in Shanghai marks another milestone in China’s slow and steady push for economic liberalization. The move has been hailed by some observers as the biggest step in Chinese economic reform since Shenzhen was designated a special economic zone in 1980.

Inside the area, covering a modest 29 square kilometres, there will be few restrictions on foreign investment, while interest rates will be set by the market. The zone will allow foreign access to industries that previously placed heavy restrictions on outside companies, including banking. There are added bonuses to being in the zone: Facebook and the sale of video game consoles – both banned in mainland China – will be available in the area. It is also thought that property prices in areas surrounding the special economic zone will spike.

But the scope for Shanghai to become an international financial centre to rival its neighbour Hong Kong is limited.

Although the securities regulator announced that it would allow parent companies of banks based in the zone to issue bonds in the domestic Chinese market – something that has happened on very few occasions in China in the past – Citi and DBS are so far the only two foreign institutions to have been granted access to the zone.

Moreover, Shanghai’s rise will mean that trading in renminbis will only get bigger and better. As a result, Hong Kong’s market share will also grow in absolute terms. Shanghai’s rise could be beneficial to Hong Kong rather than a hindrance.

And as is often the case with China, the free trade zone in Shanghai is a trial: Beijing will wait and see if the zone has been successful before scaling up the project or expanding it through the country.

So before Shanghai builds up a sizable international presence in the zone, Hong Kong has an opportunity to shape up. The Hong Kong government has been handed an opportunity to assess and further develop its strengths and advantages to maintain its upper hand, especially since the free trade zone in Shanghai isn’t due to be completed until 2020.