Shanghai Free Trade Zone (FTZ) Unlikely To Dethrone Hong Kong As World's Gateway To China, At Least In Short Term

Shanghai’s new Free Trade Zone (FTZ) could prove to be a game changer for China’s carefully managed economy and free up the yuan in unprecedented ways. But so far Hong Kong, for which many speculate the FTZ could pose a competitive threat, is feeling secure in its position as one of the foremost global financial centers and the world's gateway to the mainland.

The FTZ, rather than being a competitor for Hong Kong, could instead provide more business for the special administrative region (ADR).

Hong Kong has been a beneficiary of preferential economic policies in comparison with mainland China since its 1997 handover from the United Kingdom, and acted as China’s designated global offshore yuan center. The Shanghai FTZ, which promises a more open and streamlined environment for foreign firms to do business in China, could become a second Hong Kong. However, experts don’t think that's bad news for Hong Kong at all, Reuters reported Monday.

“Shanghai’s rise means that the international trading pie in the yuan only gets bigger and Hong Kong’s share will grow in absolute terms,” said Robert Minikin, a strategist at Standard Chartered Bank in Hong Kong.

The FTZ is expected to relax policies for a number of service sectors, including banking, which has been Hong Kong’s stronghold in Asia. However, far-reaching reforms like a more convertible yuan and liberalized interest rates could take time. In the short term, Hong Kong is unlikely to be adversely affected, officials from the ADR believe.

"We’re not looking at Chinese cities as [competition], rather we see Chinese cities as customers of HK," Chan Ka-Keung, secretary of Hong Kong Special ADR Financial Services & Treasury, said, according to CCTV, China’s state media.

But in the longer term, Hong Kong will need to face international competition from Shanghai as well as financial centers like New York and London, and will need to foster its own strengths and specialties instead of worrying about Shanghai, said Sung Yun-wing, director of the Hong Kong Shanghai Development Institute, according to the Agence France-Presse (AFP).

For example, the FTZ will force Hong Kong to look closely at the competitiveness of its financial services sector as costs skyrocket and its business from the mainland slows, as well as the pricing of its financial services.

"We don't mind being expensive, but we have to provide value for money," said Nicholas Kwan, research director for Hong Kong's Trade Development Council, according to Reuters.

The Shanghai FTZ will not be finished until 2020, giving Hong Kong more than a decade to consolidate and press ahead in its advantage. But it will definitely need to be proactive.

"I think it's clear Hong Kong will face pressure of competition from Shanghai," Shen Minggao, Citibank's chief economist for Greater China, told the AFP. "Hong Kong should take advantage that it has been the first mover in China's financial sector. If it doesn't do that, it will be waiting for Shanghai to catch up and let Hong Kong be marginalized."