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Reform paralysis clouds Shanghai free trade zone project

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A disappointing first year for Shanghai's much-hyped free-trade zone, seen as a pet project of Premier Li Keqiang and billed as a reform laboratory, raises questions about China's commitment to opening up its markets as it wrestles with a slowing economy.

The 29 square kilometer zone on the outskirts of China's commercial capital - hailed as Beijing's boldest reform in decades - was meant to test changes such as currency liberalization, market-determined interest rates and free trade.

But progress has been slow and policies vague as the political focus has turned from reform to shoring up growth, leaving foreign companies unsure of investing in the free-trade zone (FTZ).

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"There has been some progress in the Shanghai free trade zone, but the progress is much slower than the market had expected, especially in the financial market sector," said Zhu Haibin, chief China economist at JP Morgan in Hong Kong.

In particular, China needs to transform government functions and release a list of which sectors are off-limits to foreign investors rather than assessing investments on a case-by-case basis, Zhu said.

"If the progress is too slow on this front, it may risk turning out to be a failure."

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A broad reform agenda to remake China was unveiled to much fanfare in November 2013, but an unexpectedly sharp slowdown in the economy at the beginning of the year quickly saw attention refocused on ensuring the government's 7.5 percent growth target would be met.

"We've seen some policies in the free-trade zone, but they are not relevant to my company and we haven't seen any benefits yet," said a corporate treasurer at a major foreign manufacturing technology company who asked for anonymity as she was not authorized to speak on the issue.

On Wednesday, Premier Li said Beijing would review the development of the Shanghai FTZ. The FTZ was widely seen as Li's pet project, but he did not attend the opening ceremony last year. The heads of the central bank and the foreign exchange regulator were also absent.

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Slow take-off

The free trade zone, part of wider financial reforms such as transitioning to a fully convertible yuan currency, is seen as an important step towards developing a more open economy regulated by policies similar to those in developed markets.

Newly-registered foreign enterprises accounted for 12 percent of the more than 10,000 firms allowed to operate within the zone by the end of June, official data showed. But excluding Hong Kong and Taiwan, foreign companies comprised just 6 percent, or 643 entities, far less than expectations.

Even local companies have frustrations.

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"We don't feel the policies that govern the Shanghai FTZ are attractive and we've had to wait for such a long time for new policies to be launched," said a senior manager from a Chinese company, speaking on condition of anonymity.

The Shanghai FTZ's attractions have also been reduced by the roll-out of some policies on a nationwide basis, detracting from what was meant to be the exclusive nature of policies within the zone.

Pilot schemes that have been made available nationwide include cross-border cash pooling and netting for multinational companies as well as cross-border trade settlement for individuals.

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"Some companies feel it's unnecessary to set up entities in the FTZ if the only purpose is for cross-border fund flows, since they can already do it now outside the FTZ," said Becky Liu, a strategist at Standard Chartered Bank in Hong Kong.

A Shanghai government official familiar with FTZ matters, who asked not to be named as he was not authorized to speak to the media, downplayed concerns about the first year.

"This is China. We make the announcement first, set the overall direction and then slowly implement policies around it."