Launch zone challenges

May Yan, a banking analyst for Barclays Capital in Hong Kong, says it is far easier to place a border around a zone where goods are manufactured than one that applies to services and, in particular, the movement of money.

"You can actually control physical goods. There is only so much you can actually smuggle but finance is just numbers in a computer that can be switched very quickly. The wiring of money is so easy."

The "general plan" for the zone states the convertibility under the capital account will be introduced gradually through a series of trial programs as will market-orientated interest rates.

He Weiwen, co-director of the China-US/EU Study Center at the China Association of International Trade in Beijing, says the authorities are being understandably cautious.

"In the broad master plan of the free trade zone the wording referred to the full convertibility of the yuan. In the State Council's notice this wording was removed because it might be too early to say that. However, the currency will have to be convertible within the capital account, or the free trade zone will have no meaning," he says.

Simon Gleave, regional head of financial services for KPMG Asia-Pacific, based in Beijing, says the problem for the authorities is that they are attempting something completely new.

"No country has tried to open up and deregulate at this stage of its development and when it is of the scale that China is now. It is already the world's second-largest economy so to try and create a convertible currency in one go is a very big ask and a very big unknown in terms of the effect it might have," he says.

"The implications for the rest of the world of getting it wrong are quite important. That is why it is important to use some sort of pilot area which is already in the center of China's capital markets."

One of the aims of the planners is to make the FTZ attractive to multinationals and the hope is that a number of them will make the zone their Asia headquarters. Many multinationals now do the majority of their Asia business on the Chinese mainland but have their base in Singapore or Hong Kong. This involves a lot of unnecessary travel for many senior executives visiting their operations in the world's second-largest economy.

The reason why they do this is because under the current currency conversion rules they would not be able to transfer money between their various Asia locations and their headquarters, if it was in China.

If these currency restrictions were removed, it would make no difference if the headquarters were in the FTZ, Singapore or elsewhere. Money could flow freely in and out of the zone. The problem of getting money out of the rest of China would remain for the zone-based company but it would be at no disadvantage to a company based elsewhere in Asia.

He at the China-US/EU Study Center at the China Association of International Trade believes it is not clear yet whether multinationals will move to the zone.

"Most companies have their manufacturing or research and development base. To have a regional headquarters in China, you need to be able to do international settlements. This is a step in the right direction but it is too early to say."