Creeping reforms as China gives Shanghai Free Trade Zone go-ahead

Carlos Barria/Reuters - A man walks under a elevated road in downtown Shanghai, July 26, 2013. For all the strong rhetoric, China's latest policy actions suggest a shift in focus on the economy to mix relatively pain-free reforms that burnish Beijing's credentials for change with measures to prop up sagging growth.

By , Monday, August 26, 3:45 AM E-mail the writers

BEIJING — China's decision last week to open a free-trade zone in Shanghai is one of the first, cautious economic measures adopted under new President Xi Jinping. But the incremental nature of the move, together with the lack of specifics about the economic program more generally, raises questions about whether the government will move fast enough to rescue a slowing economy.

The announcement of the trade zone comes at a time when foreign and domestic business leaders are anxiously looking for evidence of whether the leadership will make good on Premier Li Keqiang's pledge to open up the economy "no matter how deep the water." Experts are beginning to conclude that changes will be gradual rather than dramatic.

Xi may not be able to undertake sudden, radical measures even if he wants to because vested interests linked to the massive state-owned enterprises wield considerable power and are resistant to change. The trial of former regional kingpin Bo Xilai, who retains support among grass-roots cadres in the Communist Party, has also been a distraction, with party unity a greater priority than any sudden economic change of tack.

In any case, Xi does not seem like a man to take China in a radically new direction, economically or politically, experts say.

"We are not going to have Margaret Thatcher coming in and upsetting the apple cart," said Arthur Kroeber, managing director of GaveKal-Dragonomics.

The Shanghai Free Trade Zone was approved by Li's cabinet to "explore a new path and a new mode of opening up to the outside world," the Commerce Ministry announced last week. The official Xinhua news agency said the cabinet agreed Friday to relax some of the laws restricting foreign companies in the trade zone, without giving details.

Media reports suggest that the zone could allow for a loosening of capital controls and flow of private capital into the banking sector, while supporting Shanghai's ambitions to become a global financial center. The move is also a step toward the full-convertibility internationalization of China's currency, the renminbi, said Zhang Monan, economics researcher with China's State Information Center, a government think tank. But in itself, the zone will not do much to address China's immediate economic challenges.

There is widespread consensus that China's investment- and export-led model of growth is not sufficient to sustain another decade of rapid economic expansion, that the private sector needs to expand at the expense of state-owned companies and that consumers need to spend more. But it is also becoming apparent that China is not going to rush the adjustment process, nor turn off the taps of infrastructure spending: Growth, which slowed to 7.5 percent in the first half of this year, will not be allowed to fall below 7 percent, Li has said, while credit continues to expand at a rapid clip.

Nevertheless, plans to invest more on critical infrastructure projects, such as railways and broadband, suggest the government is undertaking a more considered approach than it did during the wild spending spree after the global financial crisis. Similarly, a recently announced audit of local government debt suggests an attempt to rein in the excesses of the past few years.

Traditionally, the new leadership spells out its economic plans in more detail at the Third Plenary Session of the Communist Party's Central Committee, expected this year in October. But the fact that there has been little talk in the media about major reforms is in itself indicative, said Russell Leigh Moses, dean of academics and faculty at the Beijing Center for Chinese Studies. Instead, the emphasis in the party-controlled media has been on Xi's efforts to clean up the Communist Party, reconnect with the "masses" and combat corruption.

"If a lot of economic reform was on the table, we'd see more of it being discussed, and we haven't," Leigh Moses said.

Liu Yuanchun, economics professor at Renmin University of China, also warned against expecting too much from the Third Plenary Session. "It cannot be an overnight clear-up move; it's definitely a slow, gradual process," he said.

Last month, Xi told a gathering of officials in Wuhan in central China that the country needed to "break the barriers from entrenched interest groups." That, said Wang Yukai, a professor from the Chinese Academy of Governance, was evidence that Xi remained committed to change.

"Leaders don't say things like this for nothing," Wang said. "It shows they are still determined to reform, even when the reform met strong barriers."

Zhang, the researcher at the State Information Center, said she had been involved in drawing up some of the economic plans and expected a series of measures to be unveiled later this year.

"Premier Li Keqiang is not a hothead, he is prudent man," she said. "The central government has to start reforms at the right moment, and they also need to consider stability."

Recent economic data have calmed fears of a dramatic economic slowdown, with a survey of manufacturer sentiment in August released Thursday showing orders rebounding. That may buy Xi and Li some time as they try to their fellow party bigwigs of the need to move forward.

But Kroeber of the Dragonomics research firm said the two still need to set out a clearer vision of how they intend to proceed. "They don't have to do major surgery," he said. "They have a decent economic environment to work in. It is not like they have to do everything very quickly, but they do have to get moving in the right direction, in a fairly decisive way, fairly soon."

Liu Liu contributed to this report.