HONG KONG - A disappointing first year for Shanghai's much-hyped free trade zone (FTZ), seen as a pet project of Premier Li Keqiang and billed as a reform laboratory, raises questions about China's commitment to opening up its markets as it wrestles with a slowing economy.
The 29 sq km zone on the outskirts of Shanghai - hailed as Beijing's boldest reform in decades - was meant to test changes such as currency liberalisation, market-determined interest rates and free trade.
But progress has been slow and policies vague as the political focus has turned from reform to shoring up growth after the economy experienced a sharp slowdown early this year, leaving foreign companies unsure of investing in the FTZ.
In another setback, the state-run Xinhua news agency said yesterday that the zone's deputy head, Mr Dai Haibo, had left his post, which put him in charge of the FTZ's daily operations.
Hong Kong's South China Morning Post paper, quoting sources, reported earlier that Mr Dai was suspected of disciplinary violations and would be forced to step down.
Mr Dai, 52, might be allowed to remain in his other main role as deputy secretary-general of the Shanghai government, Chinese media quoted sources as saying.
"There has been some progress in the Shanghai free trade zone, but the progress is much slower than the market had expected, especially in the financial market sector," said Mr Zhu Haibin, chief China economist at JPMorgan in Hong Kong.
In particular, China needs to transform government functions and release a list of which sectors are off-limits to foreign investors rather than assessing investments on a case-by-case basis, Mr Zhu said.
"If the progress is too slow on this front, it may risk turning out to be a failure."
Last Wednesday, Premier Li said Beijing would review the development of the Shanghai FTZ, which opened on Sept 29 last year.
He pointed out that the zone is expanding on its list of "what not to do" so as to give more room to firms to innovate and to ensure they operate in a free, fair and deal-honouring market, Chinese media reported.
He also said the FTZ's experience could be duplicated in other parts of China.
Newly registered foreign enterprises accounted for 12 per cent of the more than 10,000 firms allowed to operate within the zone by the end of June, official data showed.
But excluding Hong Kong and Taiwan, foreign companies comprised just 6 per cent, or 643 entities, far less than expectations.
The FTZ's attractions have also been reduced by the roll-out of some policies on a nationwide basis, detracting from what was meant to be the exclusive nature of policies within the zone.
Pilot schemes that have been made available nationwide include cross-border cash-pooling and netting for multinational companies as well as cross-border trade settlement for individuals.
"Some companies feel it's unnecessary to set up entities in the FTZ if the only purpose is for cross-border fund flows, since they can already do it now outside the FTZ," said Ms Becky Liu, a strategist at Standard Chartered Bank in Hong Kong.
A Shanghai government official familiar with FTZ matters downplayed concerns about the first year.
"This is China. We make the announcement first, set the overall direction and then slowly implement policies around it."