China’s hastily and recently launched first mainland free-trade zone is destined to be a laboratory for remaking the country's financial sector by attracting investment and internationalizing its currency. The China (Shanghai) Pilot Free Trade Zone (“SHANGHAI PILOT FTZ”) is expected to allow banks and other businesses within its boundaries to experiment in areas that are tightly controlled in elsewhere in China. The plan includes loosening the regulation of interest rates and full convertibility of nation’s currency, the renminbi (RMB), even though the rest of Mainland China remains subject to currency controls.

The pilot zone covers 29 square kilometers, or about 11 square miles, of ports and logistics areas in Waigaoqiao, Yangshan and Pudong New Area in Shanghai. Although the government of Shanghai is named as the manager, the common understanding is that the central government of China (a.k.a. Beijing) is in actual control of the issuance and means of implementation of policies applicable to the SHANGHAI PILOT FTZ.  Despite the lack of clarity in the functioning of the zone, many parties with high hopes have already established companies.

Most of the SHANGHAI PILOT FTZ's favorable policies are designed for foreign-invested companies and international transactions, rather than Chinese domestic or local businesses and companies with the exception of outbound Chinese investment. Developments in the transformation of the SHANGHAI PILOT FTZ will be influenced by the parties’ final agreements to be embodied in the China-U.S. Bilateral Investment Treaty (“BIT”), which is under active negotiation and is expected to become effective in three to five years. Considering the broad scope of this BIT compared with previous investment treaties between China and other countries, this one promises to be a real “game-changer” for China in the world commercial community since its provisions will be passed onto other countries through the “Most Favored Nations” provisions in their treaties.

The SHANGHAI PILOT FTZ in many respects is trying to compete with Hong Kong and Singapore, the pioneers and leaders of free-trade zones in Asia. Even though the introduction of such zone is certainly exciting, critical implementation details are yet to be issued under the General Plans of SHANGHAI PILOT FTZ1. The table below lays out the already-issued policies and those predicted by various economists, government commentators and lawyers based on their understanding of the General Plans of SHANGHAI PILOT FTZ1:

Click here to view table.