In the spring of 1979, Deng Xiaoping drew a circle along China's South China Sea. In the summer of 2013, the Chinese government drew another circle on the East China Sea - the China (Shanghai) Pilot Free Trade Zone. Three major backgrounds of the free trade zone The establishment of the Shanghai Free Trade Zone has the following three major historical backgrounds: The first background is global trade competition. At present, the three major economies of the United States, Europe and Japan are trying to form a new generation of high-standard global trade and services through TPP (Trans-Pacific Partnership Agreement), TTIP (Transatlantic Trade and Investment Agreement) and PSA (Multilateral Services Agreement) rules to replace the WTO. Regarding the new round of game rules, if it may be difficult for the entire country to enter, we can first let the free trade zone take the initiative to open the door. All countries can come and invest and trade freely, creating a small window for docking, and appropriately integrating them. Certain high business standards map across China's manufacturing and services industries. If the experiment fails, the impact will be limited due to the limited scope. Once successful, it can be further expanded and promoted and fully connected to the entire Chinese economy. The second background is China’s own reform needs. It cannot be said that all game rules formulated by developed countries are wrong, because many rules are in line with the inherent laws of market development and economic upgrading. Therefore, China must treat it with a positive attitude. Some of these reasonable rules are compatible with China's own reform direction. Therefore, we still have to adopt the principle of least common denominator to find intersections and promote our own transformation and development. At the same time, we can use this rule to eliminate most vested interests and interest groups, and finally establish internationally accepted rules to avoid more unreasonable interests and paths. rely. Similar to when China joined the WTO, it was the so-called "opening up to promote reform." If the current main contradiction cannot be changed, then we might as well open up more and be more open. Therefore, the establishment of the Shanghai Free Trade Zone is an important measure for the current government to strive to create an "upgraded version" of the Chinese economy. The third background is the internationalization of the RMB. The cross-border use of RMB that started in 2009 seems to be quite large. Hong Kong now has an official figure of 800 billion, but the actual number may be 1 trillion, and Taiwan also has 400 billion. However, these RMB released due to trade demand account for less than the total global currency. The proportion is still very small. China really wants these RMB to fly overseas more and longer. But objectively speaking, if the motivation for the return of these capitals to make profits is not met, the total amount of overseas RMB currency will still not be able to expand, and building a closed loop of return requires a huge, deep and broad financial market (basic and derivative). accommodation and throughput. At present, Shanghai’s biggest advantage is that it has the most comprehensive exchanges, inter-bank markets and factor markets in the country. Therefore, Shanghai will definitely become the largest destination and distribution center for the return of RMB. In the past, there were no free trade zones. The leading source of capital inflows had to be directly connected to the mainland's asset market, and it was necessary to obtain RMB assets through QFII channels or through trade channels. With the establishment of the free trade zone, we can first establish a huge buffer zone and reservoir of financial assets to improve the global circulation path of the RMB, and finally open up the capital account under controllable risk conditions for two-way investment and mutual penetration. Achieve optimal global allocation of financial resources and enhance the international status of the RMB. The Four Missions of the Free Trade Zone In short, the Shanghai Free Trade Zone shoulders four major missions. 1. Liberalization of trade: that is, the free import, manufacturing and re-export of goods without customs supervision, prohibition or tariff intervention. The purpose of Shanghai is not to be the port with the largest container throughput, but to engage in entrepot trade and offshore trade. There are two core components here. One is to attract the headquarters of multinational companies, and the other is to build a commodity trading platform. The core of offshore trade is to solve the capital control problem of multinational companies. Enterprises in the free trade zone are allowed to establish an international capital pool and a domestic capital pool, with interconnection channels designed among them. In this kind of trade, the order and financing links are completed in Shanghai, and the goods may not pass through the port of Shanghai. The free trade zone will not be turned into a container yard, and will explore misaligned competition and collaborative cooperation with the surrounding areas of the Greater Yangtze River Delta. More importantly, we should promote the development of service trade related to free trade in goods, especially supporting international bulk commodity trading platforms and shipping financial trading platforms, allowing domestic and foreign companies to participate in commodity futures and shipping forward transactions. In the free trade zone, overseas futures exchanges will be allowed to designate or set up delivery warehouses for commodity futures. Once completed, they will replace part of the role of LME warehouses in Busan, South Korea and Singapore. These designs will not only promote the development of related service trade and service outsourcing industries (including financial leasing, inspection and maintenance, auditing and accounting, etc.), but also reduce the threshold and cost for multinational enterprises to conduct global resource allocation and commodity price risk management, which will help The prosperity of the free trade port. 2. Liberalization of investment: Fully implement pre-establishment national treatment and negative list management. You can enter if you are not allowed to do so, and you can do everything except those prohibited by the negative list. This specifically targets the service industry: financial services, shipping services, business services, professional services, social services, and cultural services. All six areas are open. Practice has proved that, whether it is manufacturing or service industry, any field that is relatively open to the outside world and actively participates in global resource competition will develop better and become more competitive. Therefore, most investments in the free trade zone will implement a registration system, and many restrictions on foreign shareholding ratios or business scope will be cancelled.

It is expected to take the lead in reforming investment project management, foreign-invested enterprise establishment and change management, and industrial and commercial registration within the pilot zone. Many modern production and lifestyle service industries such as shipping, credit investigation, financial leasing, inspection and maintenance, performance brokerage, entertainment culture, education and training, and medical care will implement fair access standards for foreign and domestic investment. Domestic investment is welcome. Private capital and overseas direct investment. In fact, this should also be a preview of the ongoing Sino-US Bilateral Investment Agreement BIT negotiations. China has agreed to conduct substantive consultations with the United States based on pre-establishment national treatment and a negative list. The "national treatment" for foreign investment will be extended to "pre-admission" for the first time, and it will no longer rely on the current "Foreign Investment Industry Guidance Catalog" for administrative control, in exchange for a more transparent foreign investment access review process in the United States. . This is also significant for the reform of Chinese government institutions, which aims to eliminate the approval power of existing government departments and the corresponding rent-setting and rent-seeking abilities. In addition, investment is also two-way, encouraging Chinese capital to invest directly overseas from the free trade zone. Maybe in the future, in free trade zones, foreign investment will only need to be registered. Encourage the establishment of foreign equity investment funds and provide corresponding intermediary services, so that the free trade zone can also become a platform for Chinese capital to go global, and vigorously promote the "going out" strategy. 3. Internationalization of finance: Its ultimate purpose is to promote the internationalization of RMB. One hurdle that must be passed is the deregulation of capital accounts. It is expected that within the free trade zone, investment and trade-related funds can be freely converted, and interest rates and exchange rates are determined by the market. We will actively explore pilot reform of international foreign exchange management and establish a foreign exchange management system that is compatible with the free trade zone. At the same time, qualified foreign-funded financial institutions are allowed to establish foreign-funded banks, and private capital and foreign-funded financial institutions are allowed to jointly establish Sino-foreign joint venture banks (possibly with limited licenses). Encourage them to establish comprehensive trading platforms and fully liberalize product innovation. Financial institutions in the free trade zone are also allowed to issue bonds overseas. After receiving the money, they can lend money to enterprises in the free trade zone and break through the existing loan-to-deposit ratio restrictions. At the same time, the foreign debt management methods of enterprises in the free trade zone will be reformed, and efforts will be made to realize the centralized operation of foreign exchange funds in order to establish a global capital management center for multinational enterprises. The financial development vision of the future free trade zone is great. The first step is to initially realize the free trade and offshore finance functions of Hong Kong, Singapore, Macau, Switzerland, Cayman, and the Virgin Islands, and allow qualified businesses in the zone to Chinese banks are engaged in offshore business; at the same time, they are considering cultivating an onshore and offshore separated financial center (international board) with the help of designs such as New York’s International Bank Facility (IBF) and Tokyo’s JOM, and then establishing appropriate channels. and pipelines (can be quotas, regions, account types, transaction categories, etc.), partially open up the offshore and onshore markets, achieve limited interconnection, allow funds to penetrate each other within a certain range or limit, and establish a separate penetration type (first One-way and then two-way) financial markets. Under the premise of controllable risks and improved efficiency, it will eventually form a truly global financial center similar to London, fully penetrated and integrated internally and externally. 4. Administrative simplification: The free trade zone will implement an innovative new regulatory service model of "complete liberalization of the first line, safe and efficient control of the second line, and free flow of goods within the zone". "First line" refers to the national border, and "thorough" is constantly emphasized. . Therefore, one of the most important tasks in the construction of the free trade zone is to simplify the existing open pilot projects, reduce administrative costs, and provide an effective path to integrate the existing special customs supervision zones. It is foreseeable that in the future, in the free trade zone, all market administrative functions such as quality inspection, industry and commerce will be consolidated into one agency, and the financial supervision scattered in the Bank and the Three Commissions may also be merged into one Financial Management Bureau, so in the true sense The reform of large-scale ministries can be fully realized in the experimental zones. Its ultimate goal is to establish a centralized and unified market supervision system, transform government functions, improve administrative transparency, conduct local legislative experiments and perform investor rights protection functions. This is the new governance concept of practicing "small government" and also The latest attempt to clarify the optimal boundaries between markets and government. Scalability and future prospects of free trade zones So what about the scalability and replicability of free trade zones? This involves two issues. One is whether there is room for expansion in the free trade zone itself. 28 square kilometers is very small, and many articles currently being done are actually outside 28 square kilometers. Therefore, there is room for future expansion. It mainly depends on the effect of the pilot. It is not ruled out that the free trade zone will be extended to Pudong or even the entire Shanghai in the future. The second is whether other local free trade zones will keep up. The management may release other horses for balance and competition. There are also rumors that several regions have already submitted plans, but there may be some difficulties in the short term, mainly because of this. The intensity, scale and difficulty of an institutional innovation in a free trade zone are so large that existing administrative agencies will have to digest and adapt to them. If they are replicated many times in a short period of time, their workload may be overloaded. Unable to respond effectively. As the top-level design of the seven major reforms, the core lever for pulling the new troika from top to bottom, and a comprehensive and positive experiment and response from the bottom up, Shanghai's free trade zone experiment is as significant as or even surpasses the first round of opening up to promote reform. Shenzhen Special Economic Zone was established. This is a microcosm of China's current efforts to promote reform. It is not just one or two tax incentives, nor is it the investment of one or two key enterprises, but the true comprehensive innovation and upgrading of mechanisms and systems.

This is a complete comprehensive experimental zone from economic system to regulatory system to administrative system reform. It will create a market economy environment that is in line with international practices, free and open, and encourages innovation. The author of this article, Shao Yu, is a Ph.D. in finance, a John SWIRE scholar at Oxford University, a researcher at the Institute of Finance at Fudan University, and an adjunct professor at the School of Engineering Management at Nanjing University. He is currently the chief economist, chief strategist and head of fixed income at Orient Securities. He is the author of "Trilogy of Crisis: The Big Picture of Global Macroeconomics, Finance, and Geopolitics". The opinions expressed in this article represent only his personal views.