The free trade zone (FTZ) set up in Shanghai is expected to be a testing ground for new policies, with focus on liberalizing China's service sector, financial services in particular. Successful innovations will ultimately be rolled out nationwide, but probably only after many years. As such, this is an experiment worth watching but probably not the game-changer some believe it to be.

The imminent establishment of FTZ, covering 29 square kilometers in eastern Shanghai, has been welcomed as an important step forward in China's economic liberalization. The details of how the FTZ to operate remain sketchy and many details will probably remain so for some time. But the overall plan and general rules, which have been released, as well as comments in the official media have given a broad outline of what to expect.

A bird's eye view of the Shanghai Yangshan Deep-Water Port within the newly launched Shanghai Free Trade Zone, Sept 10, 2013. [Photo / Xinhua]

The FTZ amalgamates four existing trade areas in Shanghai that are home to many trading companies. The key new development will be wide-ranging liberalization of the zone's service sector, including opening it up to foreign companies. This focus on liberalization of services marks a key difference with the special economic zones (SEZs) set up in the 1980s, which targeted manufacturing.

Three sets of reforms have been proposed. First is the lifting of controls on investment in service sectors, including healthcare, education, shipping and other business services in the FTZ. Across China, these sectors remain dominated by State-owned enterprises and are largely protected from foreign competition.

Second, financial services will be covered by the reform. According to the plan, the government will consider to ease capital controls on companies operating in the FTZ (allowing renminbi convertibility and access to global financial markets), to remove restrictions on bank interest rates, and to allow both domestic and foreign banks to offer a broader range of financial services. Further details are still missing.

And third, the government's role in administering the FTZ will be curtailed. For example, all forms of investment will be allowed unless explicitly prohibited by the "negative list". This would be far less restrictive than the usual practice of limiting investment to areas that have explicitly been permitted.