Since the megacity's reforms have national and international significance, change has not come easy. In the past few months, Premier Li Keqiang has fought open opposition by financial industry regulators—including the China Banking Regulatory Commission and China Securities Regulatory Commission—to open Shanghai's financial services sector to foreign investors.
The reforms will not take place without resistance. Political conservatives support some economic reforms, but insist on the need for political controls. While Shanghai's FTZ will allow free access to Internet services, including Facebook, the latter have been tarnished by the U.S. NSA's excessive interference, as exemplified by the Snowden debacle.
Conservatives have their political apprehensions, while ordinary Chinese, just like ordinary Americans, have their privacy concerns. Shanghai's FTZ is advancing in parallel with China's financial reforms, which began last year, when China tightened rules on delisting companies, cut trading costs, increased quotas for foreign institutions and encouraged dividend payments.
Last March, China's securities regulator announced that China shall allow the residents of Hong Kong, Taiwan and Macau to open domestic accounts on the mainland.
For over half a decade, China's equity, bond and currency markets have expanded significantly. Now is the time for new reforms to allow commercial banks to grow their lending, to expand the fragmented bond market and to move gradually toward the securitization of loan portfolios.
The mainland is opening doors to foreign investors and financial institutions. Foreign banks are struggling to set up units in the FTZ, while Chinese banks hope to offer offshore banking business. Foreign commodities exchanges and trading companies may own warehouses in the area.
Some Chinese regulators are anxious that the FTZ could amplify external financial risks that could spread outside the zone. Their concerns are not entirely invalid.
If Chinese financial services had been more open before 2007, the crisis that pushed the United States and Europe to the edge of depression could have infected China's nascent financial sector as well. That, in turn, would have impaired global growth in the early days of the crisis, when China's double-digit growth cushioned the global impact of the financial crisis.
(Read more: Fed's dual mandate will begin to erode: Steinbock)
Most importantly, Shanghai will have a crucial role to play as China moves from investment and net exports toward consumption. The mainland's new growth model requires more sophisticated financial services, which, in turn, can support more sustainable economic growth.
In early May, the State Council unveiled an extensive plan for economic reforms in 2013, which have the potential to make China's economic growth more balanced and sustainable in the years ahead. Shanghai's FTZ will support these changes, particularly financial reforms.
In the case of Shanghai's FTZ, the State Council is leading and coordinating the development of the FTZ, while Shanghai's municipal government is in charge of execution. Ministries have only a supporting role. In China, such policy administration is the exception, not the rule.
Reforms are expected to escalate by 2015, when the renminbi could become fully convertible.
Dan Steinbock is research director of International Business at India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). See also www.differencegroup.net.