Next week (September 29^th to be exact) an
experimental free-trade zone in Shanghai will open, the first of its kind in
mainland China.  The free trade zone
boasts the possibility for relaxed trade and foreign investment standards.  Just how radical the free trade zone will be
in its implementation is unknown, and will unfold as the operations being.  Allowing telecommunications companies to
compete with state-owned providers, lifting bans on video game sales, liberalizing
interest rates, and enhancing currency convertibility are among the stated
goals of the free trade zone. 
Additionally, a Hong Kong newspaper (note: Hong Kong is itself a free
trade zone) reported yesterday that Facebook, Twitter, the New York Times and
other previously banned websites will be allowed to operate within the free
trade zone.

Enhancing currency convertibility is a broader goal of
China, which has stated its intention for the renminbi to be fully convertible
by 2015.  Currency convertibility may in
turn elevate the renminbi to reserve currency status, where the central banks
of other countries hold the renminbi. 
Reserve currencies—the leader of which is the U.S. dollar and also
includes the Swiss franc, the Japanese yen, the sterling pound and the euro—benefit
the issuing country by reducing the transaction costs for international
commerce by eliminating exchange rate conversion risks and reduced borrowing
costs.  With China’s export economy,
attaining reserve status could mean big business and big bucks.

The free trade zone also has potential implications for the
U.S. and Chinese stock markets.  For
starters, the Chinese stock market has been climbing in the wake of the free
trade zone news, and climbed again yesterday on the heels of the internet
accessibility news.  The Chinese market,
while presently still considered instable, has seen tremendous growth since the
2005 reforms of non-tradeable stock, and backed by the second largest economy
in the world stands poised as “the” emerging market.  For domestic companies and U.S. exchanges,
the free trade zone presents opportunities as well.  For example, Microsoft
is the first U.S. company that has announced a joint venture with a Chinese
technology company in order to offer video game consoles in the free trade
zone, consoles like the Xbox, which have been banned since 2000.  If the free trade zone signals greater access
to the Chinese consumer markets on a broader scale, this could mean a large
market expansion for many U.S. companies.

-Anne Tucker