China's cabinet urges Shanghai's Hong Kong-style Lingang free-trade zone to deepen reforms

The State Council, China's cabinet, has urged Shanghai to further simplify customs procedures and liberalise financial markets to spur cross-border cargo and capital flows in the 240 square kilometre Lingang free-trade zone (FTZ), a week after President Xi Jinping's visit to the city.

According to an operating guide on the development of the FTZ, cross-border trading of asset-backed securities and use of the digital yuan will be conducted on a trial basis in Lingang, mainland China's first economic testing ground of its kind. The council, which published the guide on Thursday, also underscored the importance of risk controls to ensure financial stability and cybersecurity.

"The guide is compiled to highlight the strategic role of the FTZ and encourage the zone in Shanghai to spearhead some trial programmes," the cabinet said in the guide, which was distributed to the relevant authorities, according to the Xinhua state news agency.

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"The Shanghai FTZ will be developed into a demonstration area to promote the nation's economic reforms."

Beijing allowed Shanghai, dubbed the "dragon head" of China's economy, to create the FTZ in 2013, envisioning a Hong Kong-style territory where free cross-border capital and commodity flows would be allowed.

Technically, the yuan would be fully convertible inside the zone, where foreign investors could also set up businesses such as telecoms and entertainment services providers without investment restrictions.

Customs authorities were also supposed to allow the flow of goods unhindered, with zero tariffs on imports.

But the leadership backed down on its original plan because of concerns about financial and economic risks. To date, the yuan has not been convertible under capital accounts, while goods are still subject to oversight by customs authorities.

President Xi last week made his first trip to Shanghai since 2020, and ordered local officials to step up efforts to revive the country's economic growth. He stressed the importance of cutting red tape and simplifying customs processes at the FTZ to facilitate exports and imports, according to Xinhua.

"The FTZ serves as a strategic window for Shanghai to better connect with the global economy," said Xie Yiqing, a researcher at the Shanghai Academy of Social Sciences. "It is still an important territory for further economic reforms. Obviously, reform measures designed for a high degree of openness are required."

The Yangshan deep water port, the world's biggest terminal for container carriers, is linked to Lingang by the 32km Donghai Bridge. It handled 24 million 20-foot equivalent units last year.

In October, Shanghai opened an expansive industrial park focusing on the data industry at the FTZ, as the city pushed forward with its ambitious three-year digital economy blueprint.

The International Data Economy Industrial Park is tasked with "implementing safe and orderly cross-border flows of international online data", according to a policy document unveiled by Lingang officials.

China is poised to become the first major economy to launch a sovereign digital currency, with the central bank conducting digital yuan trials in several cities, including Shanghai.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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