FTZ needs predictable reforms

Concerted efforts from all stakeholders are vital for continued success of financial experiment

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 and stressed risk prevention as the "baseline" for reform.

This is the first time the State leader warned pathfinders not to make mistakes while blazing a trail.

Shanghai responded that it will submit about 30 transplantable reform policies to the central government this year after testing them for risks.

China's financial reform has rolled down a steep slope tilted by its fast growth, but now the road is littered with risks.

The maladies are obvious. The country has robust economic growth and a chaotic stock market plagued by scams and speculation. It has more money in circulation than the economy needs, while the real economy is starved for cash.

The country has the world's most profitable State-owned banks, which rely on loans to debt-ridden local governments, bubble-blowing real estate developers and underperforming State-owned enterprises.

The economy needs a new path. Growth will slow down for a while, but it will then speed up again at a sustainable pace. But it takes power and skill to make the detour stable and neat.

Compared with the ambitious officials in Shenzhen's special economic zone in the 1980s, the officials in Shanghai have not so far demonstrated a capacity for innovation.

The main tasks for Shanghai include a market-oriented interest rate, making the yuan convertible for capital account transactions, realizing a market-based exchange rate and building up an efficient administration system for a modern financial industry. None of this is easy.

The most prominent achievement of the China (Shanghai) Pilot Free Trade Zone since its establishment last September is a long "negative list", the first such list in China, which was widely praised in the media as a signal that the government will cut red tape.

But the list, consisting of nearly 200 "don'ts", is actually a compilation, as the list's drafters have admitted, 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 disappointed with the slow pace of reform.

The FTZ administration's moves to simplify business registration rules and investment and trade activities are actually common in many other places in China.

Any fundamental changes in customs, banking and financial administration procedures require approval from the central ministries in Beijing.

"Almost every important reform we have made is related to more than two central government departments," said Jian Danian, vice-director of administration at the FTZ. "We formed an information-exchange 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 project involving all the key ministries in Beijing.

So pressing Shanghai to act as reform pioneer, a role it has never played, becomes a test of Shanghai officials' ability to coordinate different ministries.

In the 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 the stones".

The "cultural revolution" (1966-76), which ended soon after Mao Zedong'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 the government's work but also a national consensus.

But how to transform a planned economy to a market economy remains a challenge.

Deng visited Shenzhen in 1984 to see if market reform was working. Deng was happy with, if not surprised at, what he saw. The market-based reform in Shenzhen easily spread nationwide with the support of the central government, and 14 other coastal cities were chosen as opening-up locations the next year.

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 so addicted to fondling the stones, they don't cross the river, critics joke.

Premier Li Keqiang said two years ago the government should not stop making the cake larger, but the cake must be cut fairly. He hinted the government wouldn't look into how people got larger slices of cake before, but the lucky ones would have to adjust their expectations.

Yet, the attitude of compromise with vested interests hasn't made reform any easier in the past two years. He angrily pounded the table in Beijing last week, as China Business News reported, and vowed to invite third-party watchdogs to supervise and evaluate local governments' reform efforts.

Generally speaking, the resistance Shanghai officials meet in financial reform comes from SOEs and banks that benefit from their dominance of financial resources and markets, as well as corrupt officials.

Today's reformers can't just invite foreign investment.

Given China's huge economy and complaints about unfairness and pollution, reformers must be vigilant to the risks associated with yuan liberalization and market-based interest rates.

Xi's vigilance against the risks of financial reform is justifiable. But he needs to help Shanghai coordinate interests and actions of different ministries directly under his leadership. Or, the experimental field will be just a showcase.