Currently, 11 provinces and municipalities have submitted or are still revising their free trade zone plans, and new free trade zones will be approved in 2014. The second batch of free trade zones may emerge in places such as Dongjiang in Tianjin; Nansha, Qianhai and Hengqin in Guangdong; Zhoushan in Zhejiang and Pingtan in Fujian; and Qingdao in Shandong and Caofeidian in Hebei.

Looking ahead to 2014, what revolutionary impact will the collective launch of free trade zones across the country bring to China's economic transformation and upgrading and to the reform of its investment system?

Purpose of Establishment

Core Mission of the Shanghai Free Trade Zone: Exploring the Modernization of the National Governance System

If one were to identify the top ten buzzwords in China's economic field in 2013, "Shanghai Free Trade Zone" would definitely be among them, because any development concerning the free trade zone would drive related sectors higher in the stock market.

It is conceivable that the free trade zone sector, which carries the task of reform and opening up, will continue to gain momentum over the next three years. As the pioneer, the Shanghai Free Trade Zone bears the important task of piloting first, forming replicable and promotable institutional innovations.

So what will the Shanghai Free Trade Zone bring to China's economy?

Since the Shanghai Free Trade Zone was officially inaugurated on September 29, 2013, there have been two views regarding its functions and positioning.

One view holds that the Shanghai Free Trade Zone is simply a special supervision zone dominated by special policies and preferential policies, as in the past; the other view, which has more adherents, holds that the Shanghai Free Trade Zone is China's attempt to explore, through regional experimentation, the path to further expanding opening up.

Wang Xinkui, President of the Shanghai WTO Affairs Consultation Center and Director of the Counselors' Office of the Shanghai Municipal People's Government, who participated in the main design of the overall plan for the Shanghai Free Trade Zone, said at the Fourth Caixin Summit that after the Third Plenary Session of the 18th CPC Central Committee and especially the Central Economic Work Conference, the overall goal of the Shanghai Pilot Free Trade Zone has become increasingly clear and complete. "We hope that through the experiment of such a pilot zone, and through the modernization of the governance system and governance capacity, we can prepare the conditions for further expanding opening up and reform."

Responding to Changes in the Field of Investment Access

The establishment of the Shanghai Free Trade Zone is linked to the global investment rules that are being established. This is because the measures currently implemented in the Shanghai Free Trade Zone are precisely changes to the investment system and the corresponding regulatory system.

During the 2013 National "Two Sessions," Wang Xinkui, who has long studied the WTO and regional trade arrangements, said in an exclusive interview with reporters that global investment rules are currently being established, and if China does not actively join, it will face the danger of being marginalized.

Since 1985, Wang Xinkui has been a participant in and witness to China's accession to the WTO. "The problems we face now far exceed those at the time of our WTO accession," he said. "Changes in the WTO rule system occur only at the customs border. When China joined the WTO, the customs management system was already very effective."

Wang Xinkui believes that the opening up of the service industry has not been successful, and that the results of the service industry opening up in the Uruguay Round, which began in 1986 and lasted seven and a half years, were ultimately unsatisfactory.

"The opening up of the service industry actually gave each member considerable discretion, especially with regard to commercial presence. But the results were not as strong as people expected," Wang Xinkui said. But this time the background is different. The next step in global opening up is in the field of investment access. "The field of investment access, especially in services, no longer involves matters at the customs border but involves laws and regulations of almost all departments and fields within the customs border."

He believes that China's service industry opening up has the problem of a disconnect between commitments and implementation.

"Even if we have reached service industry opening commitments in multilateral, bilateral and regional negotiations and made clear commitments for departments and fields, when it comes to investment market access, you will find that these investments cannot be implemented." He gave an example: "It's like allowing your plane to fly in, but it can't find an airport and there is no one to navigate it." So the core issue in further expanding opening up now is to solve the problem of modernizing the national governance system and governance capacity.

The "Decision" adopted at the Third Plenary Session of the 18th CPC Central Committee pointed out that the overall goal of comprehensively deepening reform is to improve and develop the socialist system with Chinese characteristics and to advance the modernization of the national governance system and governance capacity.

"Now the question is, what is modernization?" Wang Xinkui believes that if we speak purely in terms of the relationship between the government and the market, we need to let the market play a decisive role in resource allocation and better play the role of the government, so the modernization of the government's economic governance system means transparency. "A transparent market management system is certainly modern."

In different governance systems, China faces an opportunity. In the process of participating in the formulation of global investment rules, can China accept the high standards in the formulation of global investment rules? An important requirement of the high standard of "transparency" is the implementation of negative list management for investment access.

The experimental content of the Shanghai Free Trade Zone is both a need of national reform and a new requirement for the investment system put forward by some multilateral, regional and bilateral negotiations that China has joined or is joining.

Financial Innovation Is Not About Building an Offshore Center

From the most direct effect, the experiment in the Shanghai Free Trade Zone is to improve the degree of trade and investment facilitation.

Wang Xinkui believes that "facilitation" includes not only "bringing in" but also "going out," and therefore requires innovation in the financial system and the customs supervision system.

He has his own understanding of financial system innovation: "The implementation of financial system innovation in the Shanghai Free Trade Zone is absolutely not about building an offshore center, creating a low-lying area, or creating a special financial zone. The sole purpose of implementing financial innovation is to serve the real economy and improve trade facilitation."

On December 2, 2013, the central bank published the "Opinions on Financial Support for the Construction of the China (Shanghai) Pilot Free Trade Zone," also known as the central bank's 30 detailed financial rules for the free trade zone.

Wang Xinkui believes that these opinions are the best plan at the current stage. He said that one crucial measure in the "central bank's 30 rules for the free trade zone" is that FTA settlement accounts for residents and non-residents in the zone can be opened at banks outside the zone and need not be opened at banks inside the zone. In this way, the central bank has established an account management system and initially established a relatively free flow system with the outside world and a penetration channel between outside the zone and within the country.

He also proposed that innovation in the customs supervision system is also being tested, with the core being a gradual shift from the previous checkpoint supervision to window supervision.

China already has the foundation for customs supervision system reform. The Shanghai Waigaoqiao (600648, stock bar) Bonded Zone, established in 1990 and accounting for half of the country's bonded zone imports and exports, long ago implemented window management, but many port areas and airport bonded zones still cannot do so and still use checkpoint management. "This needs to be piloted," Wang Xinkui said.

Whether it can be promoted depends on whether the pilot can succeed.

"The construction of the entire free trade zone has a long and arduous road ahead," Wang Xinkui said.