Free trade zones are for reform, not preferential policies

Establishing the pilot free trade zone in Shanghai is to explore a transplantable reform path for national financial reform. It is wrong that officials from other cities think the central government will tailor preferential policies for the zone, says a 21st Century Business Herald article. Excerpts:

Roughly 20 cities have applied to the central government to set up a free trade zone since the first pilot free trade zone was founded in Shanghai last September.

Xinhua News Agency said the central government is not satisfied with the swarm of applicants and has turned down all applications.

The fact is that the applicants do not understand the central government’s purpose in setting up a free trade zone and only want to seek preferential policies from the central authority.

There used to be a trend among local governments several years ago toward establishing development zones and industrial parks. It was a time when the government needed to attract investments with low tax rates, cheap land and resources. That model is now outdated. The central government chose Shanghai for the free trade zone to explore a path for future financial reforms. But many local governments have mistaken it as a new beginning to compete for preferential policies and investments from the central authority.

The recent decline in the property market, which has shrunk the governments’ revenue from land sales, is placing pressure on local governments to regard establishing a free trade zone as an opportunity to boost their local economies and increase revenues.

The main tasks for the Shanghai FTZ include forming a market-oriented interest rate, making the yuan convertible for capital accounts, realizing a market-based exchange rate reform, and building up an efficient administration system for a modern financial industry. None of this is easy.

The misunderstanding over what a free trade zone constitutes is a reminder for the central government that there is an urgent need of transforming local officials’ mindsets. They should know that the old investment-driven models, based on preferential policies, are not sustainable.

Deepening reforms is by no means a task of only the central government, but needs joint efforts of governments of various levels.