Shanghai pilot free trade zone: A test for renminbi internationalization?

Abstract

China（Shanghai）Pilot Free Trade Zone (“SHFTZ”) as well as other Pilot Free Trade Zones established in China carries on the mission to make the test for, inter alia, China’s strategic financial reforms and for Renminbi(“RMB”) internationalization in particular. However, the financial reforms in SHFTZ according to its design and relevant provisions can only provide very limited rather than fully effective test for the reforms of free convertibility, international capital transactions as well as risk hedging needed by RMB internationalization. The aim of the paper is to investigate the test effect that SHFTZ have on the above capital account reforms. It argues that the main reason for the test failure lies in “outward free and inward control” mode designed for SHFTZ which makes it an insulated customs territory, a situation which differs from the circumstances in which a currency gets internationalized. Moreover, SHFTZ runs the risk of evolving into an offshore RMB market set up inside China, a trend China should prevent because it cannot serve the testing missions mentioned above.