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Will China's new free-trade zone encourage foreign investment?
Publication Date : 08-10-2013
The Chinese economy, driven by reckless government-led investments, is now facing a brick wall. In this context, the newly opened pilot free trade zone, aimed at encouraging foreign investment, will be a testing ground for economic reforms.
In the free trade zone, which opened in Shanghai recently, various restrictions on foreign businesses have been eased on an experimental basis.
Thirty-six Chinese and foreign companies, mainly in such sectors as finance and foreign trade, including US giants Citibank, N.A. and Microsoft Corp., and Porsche A.G. of Germany, have been granted licenses to operate in the zone.
Specific deregulatory measures include one allowing market forces rather than regulators to set interest rates and another that makes it easier for foreign-capital financial institutions to establish offices there.
As foreign capital investment in China has been sluggish recently, due chiefly to soaring payrolls, the Chinese government plans to use the new free trade zone to attract more investment from abroad.
If the experimental free trade zone proves effective in reinvigorating the economy, the government said it would introduce such zones elsewhere. It appears Beijing considers the new zone as an important model project to help achieve economic reform.
Chinese Premier Li Keqiang, the No. 2 official in the government, came up with the idea of setting up the free trade zone, leading to his economic policy being called “Likonomics”.
Last month, Li said the government would uniformly promote stable economic growth, structural adjustment and reform, indicating he believes the Chinese economy is in a dire situation.
After the Lehman shock in 2008, China propped up the economy through sizable stimulus measures totaling 4 trillion yuan (US$652 billion). The country temporarily recovered to achieve double-digit growth.
Income gap widening
Recently, however, the country’s economic growth dropped to the 7 per cent range, while the widening income gap among Chinese has become a social issue. Endless corruption among senior officials of the Chinese Communist Party is further widening economic disparities.
Even more worrisome is the so-called shadow banking. Many local governments and business enterprises that rushed to make real estate and capital investments with loans extended by nonbank financial institutions have been overwhelmed by massive debts.
As debts owed by local governments reportedly total 20 trillion yuan($3.26 trillion), management of the post-bubble economy is a serious challenge.
The new free trade zone is also intended to expose local governments and domestic companies to competition from foreign firms by lowering investment barriers and promoting foreign capital investment.
It is believed that if many foreign companies operate in the free trade zone, the interest structure monopolized by domestic entities will collapse and hopefully hold down excessive investment—the chief culprit of the economic bubble. However, if competition is not carried out on the basis of certain rules and in a fair manner, the effect will be minimal.
How can the Chinese maintain stable growth and employment, while avoiding overheating the economy?
The Chinese government under President Xi Jinping is expected to spell out a basic policy of economic structural reform—deemed essential for stable growth—at the general assembly of the Chinese Communist Party’s Central Committee in November. Some difficult maneuvering lies ahead for the Chinese government.