Zone signals fresh reforms

The government's decision to set up a free trade zone in Shanghai, together with the range of other systematic arrangements it has recently introduced, marks another milestone in its reform and opening-up drive.

That drive, initiated more than three decades ago, has successfully unleashed the growth potential of the world's most populous country, helping China shake off the plague of poverty and making it the second-largest economy in the world.

However as its growth slows, amid its economic restructuring and the changing international economic landscape, the government urgently needs to renew its efforts to attract global capital and lay the groundwork for future sustainable growth.

Last year, foreign direct investment flowing into China dropped by 3.7 percent year-on-year, the first fall since 2009. Although it has rebounded strongly in the past two months, it remains unclear whether this is a temporary reaction to signs of improved fundamentals in China or an entrenched long-term trend.

It is therefore crucial that the government takes the initiative to reform the country's financial regime to tap new management methods and make it more accommodative to foreign capital.

Such efforts started last year when the government established a free trade zone in Shenzhen's Qianhai area. Hong Kong banks are now allowed to offer cross-border yuan-denominated loans to mainland companies in the zone, a step further to internationalization of the Chinese currency.

The government has also established a mechanism this month, in which major ministries overseeing financial matters, such as the central bank, the banking regulator, the securities regulatory commission and the foreign exchange administration, will join hands to better regulate the financial sector.

While it is a necessary step to handle potential risks arising from the operation of banking, securities, insurance and various derivative business forms, unifying the financial regulations is also a must as the country becomes more integrated into the global financial regime.

The Shanghai free trade zone will mark a new high in China's financial reform and opening-up as bolder steps, such as full yuan convertibility and freer capital flow across borders, will be carried out with financial liberalization.

When successful, the unprecedented program will see more liberalized financial regulations and, as those reform measures are spread to more areas, provide a systematic backup for the Chinese economy.

(China Daily 08/27/2013 page8)