Wednesday, September 25, 2013
Next week (September 29th to be exact) an experimental free-trade zone in Shanghai will open, the first of its kind in mainland China. The free trade zone boasts the possibility for relaxed trade and foreign investment standards. Just how radical the free trade zone will be in its implementation is unknown, and will unfold as the operations being. Allowing telecommunications companies to compete with state-owned providers, lifting bans on video game sales, liberalizing interest rates, and enhancing currency convertibility are among the stated goals of the free trade zone. Additionally, a Hong Kong newspaper (note: Hong Kong is itself a free trade zone) reported yesterday that Facebook, Twitter, the New York Times and other previously banned websites will be allowed to operate within the free trade zone.
Enhancing currency convertibility is a broader goal of China, which has stated its intention for the renminbi to be fully convertible by 2015. Currency convertibility may in turn elevate the renminbi to reserve currency status, where the central banks of other countries hold the renminbi. Reserve currencies—the leader of which is the U.S. dollar and also includes the Swiss franc, the Japanese yen, the sterling pound and the euro—benefit the issuing country by reducing the transaction costs for international commerce by eliminating exchange rate conversion risks and reduced borrowing costs. With China’s export economy, attaining reserve status could mean big business and big bucks.
The free trade zone also has potential implications for the U.S. and Chinese stock markets. For starters, the Chinese stock market has been climbing in the wake of the free trade zone news, and climbed again yesterday on the heels of the internet accessibility news. The Chinese market, while presently still considered instable, has seen tremendous growth since the 2005 reforms of non-tradeable stock, and backed by the second largest economy in the world stands poised as “the” emerging market. For domestic companies and U.S. exchanges, the free trade zone presents opportunities as well. For example, Microsoft is the first U.S. company that has announced a joint venture with a Chinese technology company in order to offer video game consoles in the free trade zone, consoles like the Xbox, which have been banned since 2000. If the free trade zone signals greater access to the Chinese consumer markets on a broader scale, this could mean a large market expansion for many U.S. companies.-Anne Tucker