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Home > Blogs > Anthony Harrington > China's new free trade zone in Shanghai could/should free up the renminbi

China's new free trade zone in Shanghai could/should free up the renminbi

China's new free trade zone in Shanghai could/should free up the renminbi Anthony Harrington

China has a number of free trade zones (FTZ) already, but the one planned for the country's commercial hub in Shanghai is shaping up to be unique. There may be some manufacturing, but what Shanghai's FTZ is all about is financial services and turning Shanghai into a rival to the City of London - well, not overnight, maybe - when it comes to FX trading.

The zone opened for trade on Sunday 29 September, with China's commerce minister Gao Hucheng in attendance at the opening ceremony. Hucheng was there to deliver an explicit message: this FTZ is all about "implementing a more active opening up strategy". OK, that's kind of obscure, but one can parse it as: "We had an 'opening up strategy' and now we're getting more active in implementing it". In other words: "We're not open yet, but we're sort of heading that way so don't lose heart".

Well, one can understand and sympathize with the mindset that sees shifting the world's second largest economy from a closed, closely controlled currency to a wholly free floating currency, where the market sets the price and everyone trades the yuan as the spirit moves them, as a truly dramatic step. But at the end of the day, your currency is either free floating, out there brawling for position with the rest, or it isn't - and the advantages to having a completely open currency are huge and outweigh the manipulative benefits that come from having a controlled currency. Or, at least, that's the argument that any self-respecting, dyed-in-the-wool capitalist would make. Humorously enough, it is the point of view that the Communist Leaders of the People's Republic of China are sliding towards - or perhaps have already reached.

They are certainly pushing the boat out a fair way in the FTZ. Not only are restrictions on foreign investment being eased, but China's State Council has stated plainly that the authorities are allowing the yuan to be swapped freely for other currencies and for interest rates inside the FTZ to be set by the market. Since the FTZ is not hermetically sealed from the rest of Shanghai, it is unclear as yet to what extent the effects of this experimental lifting of key currency controls can be insulated from the rest of China. Already, companies are rushing to get a foothold in the FTZ, because having a presence there looks like being able to trade the yuan with considerably more freedom - and at whatever rates the market wants to set. If the yuan shoots up against the US dollar in the FTZ, for example, one can expect the enterprising Chinese to go in for a spot of arbitraging and speculating, whatever the State might think or do. If you want dollars and you can buy them more cheaply inside the FTZ than in an office adjacent to the FTZ, where would you do the transaction? And, if Chinese and foreign banks can legitimately bring some big financial guns to bear on interest rate discrepancies within and without the FTZ, the results could be spectacular. We could see national currency controls on the renminbi evaporating like dew in the desert.

This is one of the conundrums for the Party; being a little bit free is a bit like being a little bit pregnant - you either are or you aren't. So far, China's rulers have done pretty well at the pretense that "a little bit free" is actually free, Chinese style.  You might be able to kid most of the people most of the time with that - but currency trading is not big on 'pretend'. It's a sea where the big sharks swim, and it will be interesting to see what happens next...

Further reading on China

Tags: China , City of London , Foreign exchange , foreign investment , free currency , Free Trade Zone , FTZ , Gao Hucheng , interest rates , Renminbi , Shanghai
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