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China's benchmark for economic reform
China's economic experiment - the Shanghai free trade zone - has so far drawn a tepid response from foreign banks.

China's embarked on a new economic experiment, which some are comparing to the reforms that opened up the country in the 1970s.

A 29-square-kilometre free trade zone has opened in Shanghai in an attempt to lure foreign investors, and potentially open up China's state-controlled industries.

Some members of China's business community are impatient to reduce the dominance of state-owned enterprises. But they doubt the political will of Beijing's policy makers.

And as China correspondent Huey Fern Tay reports, the free trade zone has so far drawn a tepid response from foreign banks.
Transcript
HUEY FERN TAY, REPORTER: Once a fishing village, Shanghai is now the commercial and financial epicentre of mainland China. This eastern Chinese port city has a history of business initiative, but now it's the focus of a new kind of economic experiment. The Shanghai free trade zone is the first of its kind in China. The month-old initiative is described as a test bid for changes in investment and trade policy. And people who want to do business in China are curious to know more. Timothy Lamb has been fielding mounting inquiries at his consultancy firm, which deals with international companies who want to enter the China market.

TIMOTHY LAMB, MANAGING DIRECTOR, JLJ: I got back from the holidays and I must've had half a dozen emails from clients asking about the zone and what were the benefits for them. Frankly there's just simply not really much information to provide.

HUEY FERN TAY: The Chinese government approved the zone in just two months, but subsequently published a long list of areas foreigners cannot invest in. There's also confusion about how the much-hyped zone operates, and some of the specific policies are still unclear. But despite the uncertainty, foreign banks like HSBC, Citigroup and Singapore's DBS plan to set up sub-branches in the small 28-square kilometre area of the zone.

TRACY COLGAN, AUSTRALIAN CHAMBER OF COMMERCE, BEIJING: In terms of the detail and how it's actually going to be implemented there are a lot of questions. And I think that a lot of people are asking themselves exactly how far-fetched, especially financial reform, how, what the implications of that will be.

HUEY FERN TAY: China is also following a historical pattern of trying out new policies within a confined space. Stephen Joske is a former official with the Australian Treasury. He says high-end service sectors, including health, finance and education are the main beneficiaries.

STEPHEN JOSKE, AUSTRALIAN SUPER: The Chinese government's not about to create an avenue for tax evasion. So the rationale for it is clearly to experiment with the regulatory regimes. And he'll get a better idea of what will be required when they do liberalise these sectors on a national basis.

HUEY FERN TAY: The free trade zone could indicate the most ambitious push for financial reform in China in more than a decade. The Global Financial Crisis has highlighted the vulnerability of China's export driven economy. But China's environment is also paying the price for high-speed growth. Recently, a thick smog with air pollution levels 40 times the level deemed safe by the World Health Organisation paralysed one of the largest cities in north-east China.

STEFAN SACK, EUROPEAN CHAMBER OF COMMERCE, SHANGHAI: The need for sustainable development is necessary. As you can see with the, again, recent only yesterday, we had the problems in north-east China, where no aircraft could land and go into a harbour. So if there are no big reforms being made in the very near future, this country will be in big trouble. I think people like Li Keqiang and Xi Jinping have definitely understood that.

HUEY FERN TAY: More details about the free trade zone are expected in the first quarter of 2014. But for now all eyes are on the third plenum, a significant political meeting in November. In the past, China's leaders have used this event as an opportunity to make major policy announcements, including the reform and opening up of China's economy in 1978.

TIMOTHY LAMB: I think we really just need to wait and see what is going to happen after the plenum occurs. I will say that this zone itself will be a bellwether for this administration in terms of its ability to actually be able to get reforms instituted and pushed through. There's a lot of an entrenched interest within the party and the government itself, that they're going to be up against a significant amount of resistance.

HUEY FERN TAY: But anyone impatient for rapid change is likely to be disappointed. Although financial reform is gaining traction with the launch of the Shanghai free trade zone, history has proven that China's policy makers prefer to tread cautiously.
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