shanghai_ftzShanghai’s new Free Trade Zone  has attracted a lot of media attention as many see it as laboratory for reforms that could one day be implemented nationwide.

Some 25 companies have so far been given the green light to start operations including 11 financial institutions, most of which are domestic banks.

The main benefit of a business — foreign or Chinese — locating in the FTZ  comes from the greater financial openness.

Yuan convertibility, liberalised interest rates and less restrictions on  foreign investment are designed to appeal especially to foreign financial institutions and if widely embraced, could see Shanghai threaten Hong Kong’s traditional role as China’s global financial centre, some experts feel.

Xu Bin, a professor at the China Europe International Business School, downplays this threat, however, arguing that HK is well-established  and it will take time for Shanghai to evolve into a centre comparable to the HK.

He believes the two centres will have complementary roles with Shanghai being a centre for RMB-denominated investment and trade in mainland China while HK continues to be  more involved with foreign capital flows.

Shanghai FTZShanghai FTZ is first and foremost an attempt to attract international finance to Shanghai rather than, as is usually the case with free trade zones, an initiative primarily focussed on international trade.

But the FTZ will is also out to attract industries and activities beyond financial services as part of the government’s drive to gradually transform China into a modern services-based and consumption-oriented economy.

Not all industries are welcome, however, and Quartz has an interesting article on the government’s ‘black list’ of activities that are not allowed in the Shanghai FTZ.

The FTZ will not allow foreign investment in media activities but foreigners will be allowed to establish companies in hi-tech sectors such as video games, call centres or software services.

Rumors have circulated that the government might allow businesses located in the FTZ to access Facebook, Twitter and other websites banned in China, but so far there has been no official acknowledgement of this.

Pornography  businesses, which are technically illegal in China, are also not welcome at Shanghai FTZ.

Foreign firms can own Chinese energy assets but only through a JV with a local partner, and similar rules apply for the agricultural sector and Chinese medicine.

Nuclear power plants are on the allowed list, but foreign firms can only build and manage plants, not own them.

Rare earth metals, an industry which China deems strategic and in which it has a virtually monopoly, are also out of bounds to foreigners.

The strangest prohibition concerns gold courses, which are popular in China. Foreign firms are banned from building or managing golf courses.

Read this Deutsche Welle story for an interview with Nicola Casarini, an expert in EU-China relations.