Since China’s State Council approved the country’s first pilot free trade zone (FTZ) in Shanghai in July, the FTZ has been a hot topic discussed not only in the media but amongst our clients, including occupiers, developers and investors. One question being posed frequently is whether the FTZ will follow a trajectory similar to Lujiazui – an underdeveloped area which was built up into the financial centre of Shanghai over the past 20 years.

In our opinion, there is not much possibility that any of the four areas (see the map below) that initially comprise the FTZ will become “new CBDs”, due to three main reasons:

• Firstly, in terms of location, all areas of the FTZ are situated along the coastal edge of the city and are about 25-60 kilometres from the existing CBD. In addition, these zones are currently occupied in large part by warehouses, and lack a business environment, amenities, or infrastructure that could compete with downtown.
• Secondly, although the two constituent zones in Waigaoqiao are relatively close to downtown, both are largely built out and thus far no redevelopment plans have been released by the government.
• Finally, from a city planning perspective, the government does not intend to build a new financial or business centre in the new FTZ to compete with the existing Lujiazui CBD and emerging business clusters such as Qiantan. The likelihood that the FTZ will be expanded to the whole city after several years’ time means that building a new CBD in the pilot zone would ultimately be superfluous.

However, the new FTZ will have profound implications for office demand throughout Shanghai in the medium to long term. The official launch of the FTZ is a signal of the government’s continued commitment to moving forward with financial and service sector reform and to positioning Shanghai as a global financial centre. It is expected that the zone will allow for experimentation with pilot reforms in financial deregulation, RMB convertibility, and interest rate reform. This would benefit the whole city’s financial services industry and spur greater demand for downstream professional services which are traditionally located in the city’s existing CBDs.

Today much of that potential is still a long way off. While the official launch of the FTZ was held in September with a good deal of fanfare and official pomp, the specific regulatory changes remain the subject of speculation. Among the challenges policy makers will have to address are how to ring-fence the financial market reforms so that they don’t ‘accidentally’ lead to a nationwide reform before they are intended to. For example, if firms trading in the FTZ are able to relatively freely convert RMB, do the transactions have to physically take place in the zone? Do the banks’ traders need to be seated in the zone? Should we expect long lines of armoured cars carrying cash in and out of the zone?

While we see great promise and great potential in what the FTZ will mean for Shanghai and for China, the progress is likely to be slow and cautious for some time yet. With respect to real estate, we don’t think the FTZ results in the development of competing CBDs to Shanghai’s existing city centre. However, the FTZ will be a catalyst for financial reform and deregulation, which is a very important driver for office demand and will benefit the existing CBD in the medium to long term.

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