Shanghai FTZ needs neat, stable reforms to make it
Few experiments can shun risks. But some must.
President Xi Jinping, in a recent visit to Shanghai, again urged the city to push the envelope in exploring a transplantable path for financial reform through experiments in its pilot free trade zone (FTZ), and stressed risk prevention as the “baseline” for reform.
This is the first time the state leader warned the pathfinders not to make mistakes while blazing a trail.
Shanghai responded that it will hand in about 30 transplantable reform policies to the central government this year after finishing the risk-control “compression test” for all of them.
China’s financial reform has rolled down a steep slope tilted by its fast growth to such a crossroad that rushing straight along the old way may finally kill the economy with severe restrictions.
The maladies are obvious. The country has robust economic growth and a chaotic stock market plagued by scams and speculation. The country has more money printed than the economy needs, and a real economy thirsty for cash. The country has the world’s most profitable state-owned banks that just rely on loaning to the already debt-ridden local governments, bubble-blowing real estate developers and illperforming state-owned enterprises.
Taking a turn means the creation of a new blood circulation and the removal of some failing organs. The economy will slow down, but will take up speed in the long run in a sustainable direction.
But it takes power and skill to make the turning stable and neat.
Compared with the ambitious officials in Shenzhen’s economic special zone in 1980s, with which the Shanghai FTZ is often compared to by some analysts,
Shanghai officials have not so far demonstrated their capacity to “take the ox’s nose” for the turn.
The main tasks for Shanghai include 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 most reported achievement of the FTZ since its establishment last September is a long “negative list”, the first of its kind for governments in China, which is widely eulogized by the media as a signal that the government will cut the red tape.
But the list, consisting of nearly 200 “don’ts”, is actually “a collected version” as the list’s drafters admitted recently of the banned businesses appearing in all current policies, decrees and laws. The FTZ will cut it by one third soon.
Most of the 10,000 enterprises registered in the FTZ are not new and disappointed with the slow progress in some key reforms during the last nine months.
The FTZ administration’s simplifying of the procedures of new business registration, investment and trade is actually within its own reach which is common in many other economic development zones in China.
Any concrete changes in the customs, banking and financial administration in FTZ are prerequisite with the “green lights” of relevant central ministries in Beijing.
The FTZ administration has to stand out to collect different ministries’ opinions, lobby their decision-makers and coordinate their actions despite the latters’ superior rank in the bureaucratic system.
“Almost every important reform policies we made is related to more than two central government departments,” said Jian Danian, vice-director of FTZ administration. “We formed an informationexchange platform and cooperation platform with relevant ministries. Otherwise reform is difficult.”
Jian is right. China’s reform is no longer the task of an individual zone or a city, but a systematic project involving all key ministries in Beijing.
In this sense, pressing Shanghai to act as reform pioneer today, a role it had never played, becomes a test of Shanghai officials’ abilities of coordinating different ministries.
In late 1970s, Deng Xiaoping earmarked Shenzhen as an experimental field for China’s market reform. Local officials were given considerable freedom to “cross the river by feeling for the stones on the riverbed”.
The “cultural revolution”( which ended soon after Mao’s death, taught the nation, in a costly and harsh manner, that nobody benefits from class struggle. Building a market economy became not only central to government’s work soon, but also a national consensus.
But how to transform a planned economy to market economy remains a question.
Deng visited Shenzhen in 1984, a year dramatized by George Orwell, to see if market reform works there after the special zone developed for five years, other than urging Shenzhen to go faster, as Xi did today.
Deng was happy with, if not surprised at what he saw on the roof of a skyscraper not yet finished in Shenzhen.
Everyone benefits from the Pareto improvement in 1980s in different degrees, though. And the market reform in Shenzhen easily spread nationwide with the support of central government. The other 14 coastal cities were chosen as open-up cities the next year.
Yet, the growth-oriented development in absence of a mature rule by law, creates an appalling income gap, a mighty government and serious environmental pollutions in the 30 years that followed.
The environment for reformers today is completely different. Reform is no longer a national consensus, but a balance of interests among different groups.
Today, the river is too deep to wade across. Some just “become too addicted to fondling the riverbed stones to cross the river”, teased some critics in China.
Premier Li Keqiang pointed out two years ago the government should not stop making the cake larger and larger and the cake must be cut fairly from now on. He hinted the government would not look into the people getting larger shares of cake before, but the lucky dogs must adjust their expectations for the future.
Yet, the compromise attitude with the vested interests did not beget an easier reform in the past two years.
He noted one year ago touching interests is more difficult than touching souls. He angrily pounded the table in Beijing last week as China Business News reported, and vowed to invite the third-party watchdogs to supervise and evaluate local government’s implementation of reforms.
Generally speaking, the resistance Shanghai officials meet in financial reform comes from the state-owned enterprises and banks which benefit from their monopoly over financial resources and market as well as the corrupt officials seeking illegal profits from the powermoney trade in the process.
Unlike inviting foreign investment in the first market reform initiated by Deng, the current reformers, given China’s huge economic size and prevailing complaints about unfairness and pollution, must be vigilant to the risks caused by liberalizing the Yuan’s exchange rate and maket-rate interest rates, and evaluate financial reform’s influences on the real economy and overall social stability.
Xi Jinping’s vigilance to the risks of financial reform is justifiable. But he needs to give more support to help Shanghai coordinate interests and actions of different ministries directly under his leadership.
Or, an experimental field will only become just a showcase.
President Xi Jinping (holding book) talks with workers at Waigaoqiao comprehensive service hall of the China (Shanghai) Pilot Free Trade Zone (FTZ) during his inspection in Shanghai, May 23.