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FOR weeks, businessmen have speculated wildly about the Shanghai Free Trade Zone (SFTZ). This showpiece policy is meant to kickstart a broader reform agenda, due to be presented after a big party meeting in November. Despite its name, it is more of a special enterprise zone on the outskirts of China’s commercial capital (see map). The prime minister, Li Keqiang, has personally championed the pilot.

At last, on September 29th, the zone was launched. Leaders called it a landmark moment, similar to the creation of the Shenzhen special economic zone near Hong Kong more than three decades ago that ushered in reforms and spectacular growth. At a press conference, officials used the word “innovation” 43 times. Despite the gush, the launch was a let-down. Hardly any senior government figures turned up. The scheme will not include several hoped-for reforms: access to the uncensored internet, cuts in corporate tax and permission for foreign auctioneers to sell antiquities. More

troubling is that few details were given at all. “Show me the beef!” exclaims Joerg Wuttke, a former head of the European Union Chamber of Commerce in Beijing. He had been enthusiastic, but he now fears officials have grown timid.

Such concerns were hardly allayed when the authorities released a “negative list” of sectors in which foreigners cannot invest in the zone. In theory, a short list—banning guns, drugs and pornography perhaps—would be investor-friendly. In fact, the SFTZ’s negative list contains over 1,000 banned areas. Local officials insist it will be pared down, but one foreign lawyer grumbles that Chinese officials are simply “addicted to control.” Given these uncertainties, it is reasonable to ask whether the ballyhooed SFTZ can really become the next Shenzhen. The surprising answer from many experts is a cautious maybe.

Be patient, grasshopper

“Do not be fooled by the early caution,” says Chen Bo of the Shanghai University of Finance and Economics, who has advised the government on the SFTZ. “We remain very ambitious.” Mr Chen believes internal and external factors are forcing a change in China’s economic model.

At home, soaring wages and an ageing workforce are pushing China towards the “middle-income trap”. Abroad, rivals are rushing into regional free-trade deals, such as the Trans-Pacific Partnership, that will pry economies open. “China is feeling pressure to up its competitive game,” says Kenneth Jarrett, head of the American Chamber of Commerce in Shanghai.

To keep up, argue many analysts, China must liberalise. As manufacturing is already competitive, that means opening up the inefficient, cosseted services sector—especially finance. This is where the SFTZ comes in. Services have risen from just half of Shanghai’s GDP in 2003 to 62% this year (in Hong Kong, they make up 90%).

By letting experienced local officials experiment with deeper reforms in services inside a tightly sealed zone, cautious types hope risks—for example, arising from yuan convertibility—can be contained. Louis Kuijs of RBS, an investment bank, argues that, when it comes to controlling hot money, the pilot works “only if there is a very tight border between the zone and the rest of China”. On this view, only those reforms that work well in the zone will be rolled out, carefully and slowly, elsewhere.

Nonsense, say those hoping for leakage. They argue that the whole point of the zone is to spark broader liberalisation that has been stalled for a decade. May Yan of Barclays investment bank says that, if liberalisation inside the zone is not allowed to affect the rest of the economy, “the SFTZ will be merely like Qianhai [a special zone near Hong Kong], where there is not much happening”. Such critics want to see reforms move quickly from the SFTZ to other zones and the rest of China.

Many observers, however, seem willing to give the pilot zone time to blossom. Perhaps this is because they think the zone is irreversibly linked to plans for national economic liberalisation. After all, though widely known as the SFTZ, the zone’s legal name is the China (Shanghai) Pilot Free Trade Zone. Some liken Mr Li’s support for the SFTZ to his predecessors’ push for entry into the WTO in 2001, a symbol of modernisation that galvanised political support for economic reform.

And despite the lack of details, the SFTZ guidelines promise to liberalise some important sectors. Officials have outlined six areas where industries will be opened during the next three years (see table). It’s right, directionally speaking Some three dozen firms have been given permission to enter. That is meant to be an early show of confidence (though sceptics ask how they applied, since the rules have not been made public). Most are domestic ones, but Citibank, an American banking giant, is among them. Andrew Au, its China boss, accepts his firm has “no information” about how the zone will regulate banks, but says it is going in because “directionally it is the right place for the

country to go”. He notes that the Shenzhen reforms also did not offer many details at the start.

Citibank plans to open a sub-branch in the zone to handle trade financing and cash management for clients (“Our telephones are ringing off their hooks,” claims Mr Au). But he thinks even bigger opportunities will come when yuan convertibility and interest-rate liberalisation—the two biggest reforms promised—come in.

Simon Pearson, a China-based business analyst, believes another opportunity lies in simplifying and speeding up imports. It now takes up to a month for goods to clear customs, so retailers hold plenty of “safety stocks”. As it is costly to re-export, that stock is then stuck. If the SFTZ cuts red tape, he thinks not only that firms could save money through lower stocks but also that Shanghai might compete with Hong Kong and Singapore to be a regional fulfilment hub for Asian retail markets.

The biggest advance the SFTZ could bring, argues Mr Jarrett, is “predictability of regulation”. He observes that the implementation of rules in China varies across time and geography, creating tremendous uncertainty. Echoing other observers, he hopes that the management committee now being put together for the SFTZ will help co-ordinate the actions of regulatory bodies so that the new pilot is administered in a transparent and predictable fashion. Doing this means squabbling bureaucrats and regulators ending their addiction to control. China’s next stage of development may depend on it.