HONG KONG— Citigroup Inc. has received regulatory approval for its Chinese unit to start setting up a branch in Shanghai's new free-trade zone, making it among the first foreign banks to target business in the new economic experiment.

Designed to fuel development in the country's financial-services sector, China's State Council—the government's top policy-making body—on Friday released details of the new trade zone in Shanghai's Pudong district. The plan is being viewed as a cautious method to test new policies ahead of reforms in China that analysts expect to be rolled out only gradually. The nearly 29 square-kilometer pilot Free Trade Zone covers an area including hangars, docks and warehouses.

The project officially opens on Tuesday, though details on how the financial sector will be revamped remain scant.

Among the core aims of the free-trade zone are expected to be measures that will allow companies to convert money more easily from Yuan to other currencies, free up the setting of interest rates and promote more connectivity with offshore markets—luring new banking operators in the process.

"It will further open up the financial-services industry to both private and foreign capital, and encourage setting up of foreign-owned banks and Chinese-foreign joint venture banks," economists at ANZ Bank said in a note.