Launch zone challenges

One uncertainty at present is whether the FTZ model is going to be replicated in other cities in China such as the northern port city of Tianjin or Chongqing in the western part rather than a precursor to reforms rolled out across the whole of China.

"I think if we can have a successful test within two or three years we will have other similar free trade zones in Guangzhou, Tianjin and Chongqing as a second phase," says He at the China-US/EU Study Center at the China Association.

"If they are successful it can be introduced to the rest of the country. It is therefore important that the Shanghai free trade zone is reproductive."

Yan at Barclays Capital in Hong Kong says it will certainly be of interest to the foreign banks whose activities are currently heavily restricted in China.

"In China foreign banks have the disadvantage of being very small and, not having a lot of branches, they don't have a deposit base yet they are subject to the same loan to deposit ratio of 75 percent. If they are given more freedom they will be very interested."

There has been concern expressed in Hong Kong that if the zone is successful, it could pave the way for Shanghai to replace the special administrative region as China's key financial center.

"I think the most likely scenario is that they would be complementary," He says.

"If you look at Europe there are many financial centers, including London, Frankfurt, Paris, Zurich and Luxembourg. The distance between Shanghai and Hong Kong is 1,500 km so there certainly needs to be more than one financial center."

Purdy at Accenture says it is important that people do not get carried away with the idea that the FTZ will change China overnight and see it more as the pragmatic move that it is.

"It is probably not the big bang game changer that some people believe it to be. It is a testing ground for policy, a safe laboratory for market liberalization. I think it is a positive development that shows the direction of economic reform in China," he says.