A container area is seen at the Yangshan Deep Water Port, part of the newly announced Shanghai Free Trade Zone, south of Shanghai September 26, 2013. REUTERS/Carlos Barria

By Pete Sweeney

SHANGHAI (Reuters) - China has formally announced detailed plans for a new free-trade zone (FTZ) in Shanghai, touted as the country's biggest potential economic reform since Deng Xiaoping used a similar zone in Shenzhen to pry open a closed economy to trade in 1978.

In an announcement on Friday from the State Council, or cabinet, China said it will open up its largely sheltered services sector to foreign competition in the zone and use it as a testbed for bold financial reforms, including a convertible yuan and liberalised interest rates. Economists consider both areas key levers for restructuring the world's second-largest economy and putting it on a more sustainable growth path.

No specific timeline was given for implementing any of the reforms, though these should be carried out within 2-3 years, it said, adding financial liberalisation may depend on adequate risk controls. Chinese state media have cautioned that dramatic financial reforms are unlikely this year.

An executive at a foreign multinational in Shanghai said his firm was waiting for more clarity. "Is this Shenzen 2.0 heralding the beginning of a new era in trade, or a flash in the pan to simply boost economic confidence?"

GRAPHIC: Shanghai FTZ map http://r.reuters.com/xan43v

GRAPHIC: Shanghai FTZ http://r.reuters.com/xeg43v

GRAPHIC: Timeline, FDI contracts http://r.reuters.com/zeg43v

Related video: http://r.reuters.com/kuz33v

LOW-HANGING FRUIT

Frances Cheung, economist at Credit Agricole CIB, wrote in a note that the initial focus would be on promoting trade. "We note that one thing that is relevant to the RMB (renminbi) is under Point 2, where eligible Chinese banks in the FTZ are allowed to do offshore business, which is not the opening-up of the onshore RMB market as some might have looked for."

The zone, formally titled the China (Shanghai) Pilot Free Trade Zone, is slated to open on Sunday, and China will suspend certain national laws governing the establishment of foreign businesses in the zone effective October 1.

In addition to setting goals for improving financial services, trade and governance, the announcement details initiatives covering 18 different industries ranging from shipping and insurance to education and foreign banks.

The creation of the zone is hoped to reinvigorate Shanghai's economy, which has begun to lag the rest of China, and help it compete with Hong Kong as a financial centre.

In addition, state media have announced that China will soon join negotiations for an agreement on trade in services with the World Trade Organization, and many have speculated the Shanghai FTZ is also an opening move to position China for membership in the U.S.-led Trans Pacific Partnership initiative.

The document made no specific mention of allowing access to blocked foreign websites such as Facebook or Twitter from within the zone, as reported in some foreign media. However, a clause did say foreign companies might be allowed to offer "specialised telecommunications services" in the zone, and permission to offer services that break existing Chinese laws might be granted on a case-by-case basis by the state council.

MANAGING EXPECTATIONS

Hopes that Beijing will follow through on its plans have prompted speculative investment in property in and around the zone and in shares of companies expected to benefit from its construction and operation.

Shares in Shanghai International Port Group Co Ltd <600018.SS> and Shanghai Waigaoqiao Free Trade Zone Development Co Ltd <600648.SS> soared from mid-August - at one point, Waigaoqiao shares were up 332 percent before investors began taking profits on Thursday ahead of a week-long holiday.

Real estate values have also risen steadily around the zone on expectations that Chinese and foreign companies will move to rent or redevelop existing properties or build new facilities.

But economists have warned that while improving the environment for goods and services trade within the zone will be simple, the deeper financial reforms that have excited multinational corporate treasurers will prove more difficult, mainly given the risk of uncontrollable arbitrage across the zone's porous borders and internal political resistance.

Michael Klibaner, head of Greater China research at Jones Lang LaSalle, said there will be operational challenges to selling the zone to investors. For example, he noted that while the three geographic areas composing the zone - Waigaoqiao, Yangshan Port and the Pudong International Airport - are technically within Shanghai, they are over an hour's drive from the city centre.

Story continues