Shanghai free-trade zone splits analysts on benefits to economy

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The Jin Mao Tower, center left, and the Oriental Pearl Tower, center right, stand among other commercial buildings as seen from the Shanghai World Financial Center in the Pudong area of Shanghai

China's plan to set up a test zone in Shanghai with reduced state control over policies from interest rates to foreign investment has split analysts over whether it will boost the economy across the nation.

Eight of 17 respondents to a Bloomberg News survey said the so-called free trade zone will have no effect or a negligible impact on growth, while eight said it will boost annual expansion by 0.1 percentage point to 0.5 point over the next five years. One economist in the survey, conducted from Sept. 18 through yesterday, said growth would increase by 0.5 point to 0.9 point.

Any boost from the zone, set to officially open next week, would help Premier Li Keqiang sustain 7 percent annual expansion this decade and add to potential engines of growth including urbanization. Economists surveyed over the past week also indicated they expect gross domestic product gains to moderate next year after bouncing back this quarter.

"The Shanghai free trade zone is going to be a hotbed of liberalization and will have a huge economic impact in that area," said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. "But in our understanding it will be, especially in the first years, quite shielded off from China's wider economy. So the impact on the macro economy isn't going to be large."

Cabinet approval

The State Council, or cabinet, approved the Shanghai zone in July, billed as the nation's first free-trade area, on 29 square kilometers (11 square miles) of land in China's biggest commercial center. While a draft plan seen by Bloomberg News shows the zone may liberalize 19 industries from banking to shipping and allow freer convertibility of the yuan, the government hasn't published details.

Miao Hui, chief China economist at Daiwa Capital Markets in Hong Kong, said the Shanghai zone will help the broader economy in part because it will generate 200 billion yuan ($32.7 billion) to 300 billion yuan in investment, which is "very significant" at 0.6 percent of GDP.

"Most of the investment is definitely in that area but of course there will be spillover," Miao said. "If you build a modern office tower you need to buy steel, cement, all these things from the rest of China."

Li said in March, after taking office, that "reforms unleash huge dividends."

City's potential

"It's time for the country to choose a new trial for opening," Li told an economic work meeting in March. "Shanghai is qualified and has the foundation to have the trial."

The Bloomberg survey found a median estimate of 7.7 percent from 31 analysts for third-quarter growth, up from August's projection of 7.5 percent and a 7.5 percent reported pace in the second quarter. The fourth-quarter estimate rose to 7.6 percent from 7.3 percent, and the median forecast for the full year increased by 0.1 percentage point to 7.6 percent.

At the same time, the median projection for 2014 expansion declined to 7.4 percent from August's 7.5 percent, with forecasts ranging from 6.7 percent to 8.6 percent.

Economic data, led by manufacturing, have shown acceleration so far this quarter, and the government's broadest measure of credit rose more than forecast in August.

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