Blueprint for change

A government blueprint of the FTZ shows more than 90 policies. The policies, which cover five major areas, are:

• Transforming government functions

• Easing restrictions on foreign investment

• Facilitating international trade by further opening the service sector

• Deepening financial reform

• Improving the regulatory and taxation systems

"While previously other similar zones, including the Shenzhen Special Economic Zone, focused on ‘incentives' by adopting favorable income tax policies, customs and (value-added tax) breaks, the Shanghai FTZ is intended to be a testing ground for a largely free and open economy as measured by international standards," said Steven Zhang, managing director at New York-based Fund Tax Services LLC.

But Zhang, a Shanghai native, said the FTZ's tax policies will be "expected to be in line with the direction of overall tax reform in China and international practice.

"They will remain subject to study and adaptation, so as not to erode the tax base and to align with China's overall tax system for foreign investment," he said.

Norm Page, a partner at Davis Wright Tremaine LLP, a US business and litigation law firm, and chair of the firm's China practice in Shanghai, said that financial leasing companies will be encouraged to start up in the FTZ. That will include factoring activity (selling of accounts and collecting debt).

"China wants to help small and medium-sized enterprises (SMEs) get more access to financing. SMEs are the biggest source of job growth in both China and the US," said Page, who has lived in Shanghai for seven years.

In one major difference from China's other economic zones, which emphasize manufacturing, the Shanghai FTZ focuses more on the finance industry. That's an area that Chinese and Western economists have argued should be liberalized to boost the economy.

Banking regulators have already moved to allow 11 financial institutions, including the Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China), to set up branches in the zone.

The idea that these foreign banks can participate in equity and capital markets freely in the FTZ will mean more capital for the economy, which "also takes stress off the central bank", said Gutierrez.

"The next big opportunity is, in general terms, services - specifically financial services - and to open up financial services can be the next engine for economic growth for China," said Gutierrez, who served as vice-chairman of Citigroup Inc's institutional clients group.

Christopher Wells, a partner at Bingham McCutchen, a global law firm with offices in China, said that lifting some restrictions on financial services is just a very "modest" change.

"All financial markets that compete with Shanghai - Hong Kong, Singapore, Frankfurt, New York, London, Paris, Los Angeles, San Francisco and Sydney - already allow this and have allowed it for decades," he added.

The FTZ will create conditions to test yuan convertibility under the capital account, market-determined interest rates and international use of the Chinese currency within the FTZ. Citigroup is one of those institutions that plan to set up a branch in the zone.