Case for Guangdong FTZ hangs in the balance

A proposal to build a free trade zone (FTZ) incorporating Guangdong Province, Hong Kong and Macao was reportedly submitted to the State Council for approval in mid-December. If approved, the zone would become the second project of its kind after the pilot FTZ that was established in Shanghai in September.

The tentative Guangdong FTZ will include Nansha in Guangzhou, Qianhai in Shenzhen and Hengqin Island in Zhuhai, Guangzhou Baiyun Airport economic zone, as well as Hong Kong and Macao. Covering an area of about 1,000 square kilometers, the Guangdong plan was partially based (albeit on a much larger scale) on the 28.78-square-kilometer Shanghai FTZ. According to media reports, the proposed zone is designed to host experiments in six fields: manufacturing, logistics, international trade, maintenance, research and development, as well as international trade settlement.

Compared to the Shanghai project, the Guangdong-Hong Kong-Macao FTZ is expected to be not only bigger in scope, but more innovative in terms of financial reforms and more open to foreign investment. For example, Guangdong authorities are said to be calling for a mandate allowing eligible companies in the province to issue yuan-denominated corporate bonds in Hong Kong. Guangdong FTZ planners have also outlined a more simplified customs clearing system than the Shanghai FTZ, and lower barriers on investment of offshore yuan back to the mainland from Hong Kong, media reports have revealed.

Authorities in charge of the Shanghai FTZ have had to start building international trade and financial regulations from scratch; but as a cross-border zone between the Chinese mainland and the two special administrative regions, the Guangdong FTZ can quickly adopt the advanced regulatory systems already in place within Hong Kong and Macao. At the same time, Guangdong Province, a key manufacturing center, and Hong Kong, a hub for the financial and service industries, can compliment each other's strengths and weaknesses.

Many observers believe that a State Council nod on the Guangdong-Hong Kong-Macao FTZ is inevitable. Guangdong is arguably among the most suitable places to establish another trial FTZ as the province has always been at the forefront of China's economic reform process. The Shenzhen Special Economic Zone, the first special economic zone on the mainland, was founded in 1980 as a testing ground for major economic shake-ups.

By linking southern China's major powerhouses, the proposed zone will promote further economic integration within the Pearl River Delta region and form a powerful economic entity capable of withstanding the headwinds coming down from the Shanghai FTZ.

The creation of more FTZs around the country is also in line with central government policy announcements made after the Third Plenary Session of the 18th Communist Party of China Central Committee in November, when top leaders called for an expansion of economic reforms. Outside of Guangdong, a number of Chinese cities - Tianjin, Qingdao and Xiamen, to name a few - have reportedly expressed interest in building FTZs of their own over the past several months.

But despite its obvious benefits and advantages, major challenges still loom for the Guangdong-Hong Kong-Macao FTZ. As a cross-border project, the southern zone will be much more complicated to manage than the Shanghai FTZ. Of course, the size of the zone will create its own inherent challenges. And then there are numerous gaps between the legal and financial systems of Guangdong and the two special administrative regions that will have to be bridged as well. With a view toward these possible sticking points, several commentators have voiced skepticism concerning the zone's eventual approval.

It's also anyone's guess as to whether the State Council will greenlight the project so soon after the opening of the Shanghai FTZ, a project which has yet to produce any meaningful economic benefits for the country at large. Authorities in Guangdong were perhaps too hasty with their proposal - waiting another year or two would allow them to observe developments in the Shanghai FTZ.

Another possible problem with the proposed zone is it may be too similar in nature to the current Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). which was introduced in 2003 to give Hong Kong businesses easier access to the mainland market.

There is no doubt that the proposed Guangdong-Hong Kong-Macao FTZ will promote regional economic cooperation and financial innovation for China. But taking the potential problems into consideration, Guangdong will likely have its work cut out convincing the central government that an FTZ in southern China is necessary.