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It has been almost two years since China announced the Shanghai Free-Trade Zone with much fanfare. With an area now 120 square kilometres, it was heralded as a comprehensive trade zone that would test a number of economic, legal, administrative and social reforms and investment policies.

While Beijing has lauded the free-trade zone as a revolutionary step in the country’s development, reaction has been mixed. In a report last September, the Wall Street Journal said a number of foreign executives were finding the reforms “modest,” with one economist at ING saying that “caution prevails again”.

When the Shanghai Stock Index plummeted to 3,507 in July, losing roughly a third of its value from a peak reached just a month earlier, the government brought in a number of restrictions that some observers say signalled the renewal of interference in China’s free-market experiment. (The index has since rebounded to above 4,000.) And there was concern that the Shanghai Free-Trade Zone’s reforms could be rolled back.

But economist Bo Chen says the opposite is true, adding that Canadian businesses should keep an eye on the free-trade zone as it enters the next phase of its development in the coming year.

Chen, an associate department chair in the School of International Business Administration at Shanghai University of Finance and Economics, is a key consultant to the free-trade zone. He is also a Canadian (he earned his PhD in economics at SFU). Earlier this month, he held two talks (at UBC and SFU’s downtown campus) to discuss Shanghai’s progress with academics and businessmen in Vancouver.

His key message was that, given what is at stake for both Shanghai and the nation, the Chinese government will not halt economic reforms there, despite what some observers may think.

“The stakes are much higher than Shenzhen in the 1980s,” Chen said, referring to China’s first experiment with market reforms under former leader Deng Xiaoping. “Shenzhen was a small village at the time. Shanghai is already a major economic engine of China.

“(Shanghai) is the most eyeball-catching economic topic in China. Its importance can be stated in one sentence: Reforms made in the free-trade zone will be replicated across China sooner or later. If you need to understand the future of China’s business model, you need only look at Shanghai because it is the testing ground for all the policies. It is essentially a mirror for future China.”

Chen said the pace of reform should quicken this year, and by next summer the Shanghai Free-Trade Zone should more closely resemble other financial centres in the region such as Singapore.

And given the recent upheaval in the stock market, the process might even be sped up, Chen argues. Official need more experience dealing with the problems of a free market, and the only way to gain that experience is through more liberalization, not less.

“There’s a famous line from a Chinese song: ‘Without the storm, from where comes the rainbow?’” he said, adding that the recent stock market slide uncovered issues and how to deal with them.

“We’ve always said our financial market’s operational efficiency, along with our regulatory and enforcement abilities, need to improve. Without the development of a market, there would be no market upheaval. Without market upheaval, our management and regulatory bodies wouldn’t have the experience of dealing with such issues, which is necessary to improve.”

Chen points out that the free-trade zone is only one of several large-scale economic initiatives underway in China. He noted the unveiling of the so-called “One Belt, One Road” development framework that targets cooperation with many of China’s neighbours, and the launching of the Asian Infrastructure Investment Bank, a development bank that now has more than 50 partners, including Germany, France and the U.K.

The extensive Trans-Pacific Partnership agreement also looms over China’s planning. Including Canada, the U.S. and Japan (but currently excluding China) the partnership is putting pressure on Beijing to seek its own economic path.

Chen characterized the “One Belt, One Road” initiative as the Chinese version of the Trans-Pacific Partnership — a rival economic zone aimed at countries in Eurasia — with the goal of establishing deeper links with Europe while adjusting to Washington’s new focus on the Pacific.

“With ‘One Belt, One Road’, you are looking to a region where American influence is not as strong. And the key point of the whole idea is China and the EU cooperating in investment and trade. Whoever is in the middle, they will be a part of the process, but the real key is linking Europe and China. That’s why the Asian Infrastructure Investment Bank was a significant development.”

As Shanghai is the testing ground for how much of a free market China can sustain, the free-trade zone not only signposts China’s economic future, but also its geopolitical direction. The success of the entire package — Shanghai, “One Belt, One Road”, and the Asian Infrastructure Investment Bank — will be crucial to Beijing as it shifts from an export economy to a domestic-service economy.

Chen characterized it as the “middle-income trap,” when a country loses many of the advantages of a developing economy while not gaining the advantages of an industrialized one, as was the case with Brazil and Argentina in the 1970s.

A comprehensive economic partnership would give China markets for its excess production and targets for capital investment, preventing the Chinese economy from “hollowing out.”

“We need something to help us jump out of the trap,” Chen said. “It’s true that there’s no guarantee that a free-trade zone and its reforms will mean we will jump out of the trap. But without it, we are definitely not escaping it. Otherwise, China — the world’s biggest trading nation — will be left behind in global trade.”

Canadians should be mindful of the opportunities presented in Shanghai and by China’s other economic initiatives, Chen says.

“I think our Canadian friends have expressed a lot of interest, but not much understanding (of the free-trade zone),” he said. “The reason you have to understand it is this: One, China’s economic influence on countries like Canada is rising. Anytime you have a country with that many economic ties to Canada, it behooves people to understand the economic reforms that are happening.

“Secondly, in any economy, in order to achieve growth, you need to seek out markets of opportunity, where there’s potential still to be realized.

“These two major concepts in China’s financial reform policy can both potentially bring significant gains for Canada. Shanghai shows us that the Chinese market will likely see a greater degree of liberalization, which automatically brings opportunities for Canadian business.”

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