China's free trade zone fever spawns more regional hopefuls

Regional delegates to China's annual parliamentary session are pushing to have their jurisdictions included into the country's next batch of free trade zones after three new zones were approved in December. [Special coverage]

The fever to win central government's approval to upgrade existing development areas or set up new FTZs from scratch has been evident during the annual parliamentary sessions, which closes on Sunday.

One proposal came from Zhang Qingjun, mayor of Hefei, capital of east China's Anhui Province, who envisions a free trade zone connecting three other provincial capitals along the Yangzte River.

The rationale behind the proposed free trade zone, according to Zhang, is that the four cities situated along the middle of the Yangtze River face similar development challenges and all aspire to attract more foreign investment.

An inter-provincial free trade zone will also help break jurisdictional barriers for China's central provinces, a move that Zhang says will create a unified market where capital and goods can move with less restrictions.

East China's Shandong Province also wants to have a FTZ in the coastal city Qingdao, provincial governor Guo Shuqing, also former head of China's securities watchdog, told Xinhua on the sidelines of the National People's Congress.

In September 2013, four bonded areas in Shanghai, the country's financial hub, were bundled together into a free trade zone that authorities billed as a testing ground for financial liberalization, allowing greater foreign participation into the country's service sector.

The move to set up FTZs is part of China's effort to allow market forces to play a decisive role in the economy through greater opening to foreign investments into industries and removing restrictions over capital flows.

Yet the FTZ immediately became a coveted notion for local governments looking for a renewed engine to drive economic growth and respond to the central government's reform rhetoric.

Even before the Shanghai project was officially launched, word spread that southern Guangdong province and the coastal municipality Tianjin were also being considered for the initiatives.

By the end of 2014, Tianjin, eastern Fujian province and Guangdong were selected to be part of the second batch of free trade zones, inheriting practices already proved successful in Shanghai and tapping their unique geographical and industrial advantages for further experiments.

Authorities also expanded the Shanghai FTZ to include the city's financial district Lujiazui, where a jungle of skyscrapers houses the country's securities exchanges and leading financial institutions from home and abroad.

The inclusion of Lujiazui is seen as bringing more financial institutions into the game to test how the county's financial sector handles loosening capital controls and a freely convertible yuan.

Before regional delegates flocked to Beijing this month for the country's annual parliamentary sessions, local governments in landlocked Shaanxi, Gansu and Henan also unveiled their ambitions to apply for free trade zones at provincial lawmaking sessions.

These announcements have once again fueled speculation that more FTZs will come along, though the central government has not openly endorsed such proposals.

The rush to apply for FTZs is reminiscent of a similar craze over the past two decades to create development zones across the country to attract corporate investment.

Yet analysts cautioned against creating too many FTZs too soon, fearing that the central government's intention to use FTZs to pioneer more daring reforms will go awry when misinterpreted by local officials as a rebranded excuse to gain more preferential policies.

"A lot of people are still under the misconception that a free trade zone will allow local governments to gain more preferential policies," said Zong Guoying, a deputy to the National People Congress and Communist Party Secretary of Binhai New Area, a development zone that has ceded much of its land to Tianjin's FTZ.

Zong said free trade zones should be a "highland for institutional innovations and reforms" -- a popular catchphrase increasingly used by officials to refer to policies currently reserved exclusively for free trade zones but must be able to be implemented elsewhere in the country.

At the Shanghai FTZ's one-year anniversary in September, officials claimed that the zone has pioneered the streamlining of administrative procedures for setting up new companies, eased foreign investment's entry through a "negative list" approach and promoted cross-border use of Chinese currency.

So far little is known over how the three newly approved FTZs will further Shanghai's experiments. Authorities have also yet to announce dates for their official launch.

Local officials said during Tianjin's local parliamentary sessions in January that the city's FTZ will focus on financial leasing. The Fujian FTZ wants to take advantage of its vicinity to Taiwan to boost cross-Strait trade. Guangdong wants to tap its vicinity with Hong Kong.

The three FTZs, along with the one already in operation in Shanghai, are all scattered along the country's eastern shorelines, with ports handling a majority of the country's trade volume and a combined economic output equivalent to one fifth of the country's total.

"FTZs should be set up in places with economic output big enough for experiments to provide meaningful reference for future reforms around the country," said Liu Enzhuan, a Tianjin-based economic professor who participated in drafting the plan for the city's FTZ.

"FTZs definitely have a role to play in growing regional economies, but the whole idea of making investments within a FTZ easier is based on the premise that companies want to invest there in the first place." Liu said.