Shanghai Free Trade Zone Could Challenge Hong Kong

Blank agrees with assessments that change will not come to China overnight. However, the lifting of capital controls and restrictions on foreign earnings is “very, very important. People in the Transpacific Trade Partnerships and WTO have said for years that the Chinese have to open their financial system. If this happens, and it’s way too early to say it will; the devil is in the details. It’s much more than people think. It’s the first step in getting this liberalization under way,” he said.

There are three major factors in the initial process that indicate liberalization in Shanghai will be a slow process. Describing the first, Blank said, “Just to give you an idea of why you have to hold back some enthusiasm, they have a ‘negative list.’ The free trade zone will explore a ‘negative list’ management approach, so if you’re on the list you can’t do business [there]. There are 10,000 items on the negative list right now.”

The second is the fact that plans for the FTZ “involve 98 pilot programs that will be divided into two parts. The first part will not have much content about financial liberalization,” Blank said. So, between the “negative list” and the 98 pilot programs, drastic financial change is “certainly not going to happen any time soon.”

The third factor is that change is designed to be a three-year process. While those three years might be looked at as delay, the methodical approach of the Chinese means that it is likely a five-year plan will succeed it, he said, adding a five-year plan that will have been in the planning stages for a year or even two, indicating a thoughtful approach.

“Would they do it any other way? Would anyone else? They could say, okay, let’s do it [limited liberalization] for three years, on the stuff we can handle, and restrict the amount of [change],” Blank said. Then they would implement the changes in finance after changes in trade, since finance is “much more complex and much more dangerous.” Citing a Chinese proverb about “crossing the river by stepping on the stones,” he said. “They’re going to cross the river but do it one step at a time.”

The new FTZ is indicative of the direction of China’s new presidency, Blank said, which he believes will bring substantial change to the country. Xi recently visited Los Angeles, he said, in the wake of a billion-dollar investment from a major capital center in Shanghai in a six- or seven-block area of downtown Los Angeles near the Staples Center. “Shanghai is, more than anything, kind of the center of their activities for this [sort of investment], said Blank.

“It’s clearly big news, and we should not think negatively of it even in light of its restrictions and its plodding nature. It’s welcome news, and not surprising. The thing about the restrictions is that this has been thought about. It’s a very elaborate plan,” Blank said. “Full yuan convertibility and flexibility of interest rates is the financial language of reform. If that’s actually going to be done, that’s a very good definition of liberalization.”