Why Shanghai Free trade zone is a threat to Hong Kong - Essay Example

In addition, it had one of the largest stock markets in the world. However, the Sino-Japanese War destroyed Shanghai. It was further shut down from 1949-1978 during the communist rule from any financial activities. In 1950, the Shanghai Stock Market was effectively shut down; thus, closing down Forex trading and speculation. Cai (2010) adds that there was the reallocation of financial institutions from Shanghai to Beijing. According to Chen (2007), the communist government gave a directive that the Soviet mode of heavy industry be adopted for Shanghai’s development.

The impractical economic and political policies adversely affected the city’s infrastructure and economy. Consequently, many financiers and entrepreneurs left Shanghai for Hong Kong or overseas. While the economy of Shanghai was drastically declining, Hong Kong was developing fast and securing a place in the global economy. Nonetheless, economic reforms in China began in 1978, but Shanghai’s economic reforms started in 1990. Its economy has gradually been growing annually at the rate of 12%, and there has been reestablishment of financial activities in the city.

Globally, Shanghai possesses a strong competitive manufacturing base. However, the economy is changing from export-oriented manufacturing to high-end services, such as, technology, finance and business. The gains it has made from this shift are evident in the GDP, that is, service sector gives a GDP of 60.7% whereas 39.3% of the GDP comes from manufacturing. It also has established capital markets, which are: the Shanghai Futures Exchange (SHFE), the Shanghai Stock Exchange (SSE) and the Shanghai Gold Exchange (SGE).

In 2012, Shanghai’s bonded zones had a trade volume of more than $100 billion. By comparison, New Jersey and New York ports recorded a combined trade volume of $210.5 billion last year. It is projected that Shanghai, being a free trade zone, is likely to surpass the combined trade volume of New Jersey and New York in the next few years. According to the World Shipping Council, the tonnage, that is, the twenty-foot equivalent units (TEUs) of container weight, reported from Shanghai’s ports was higher than that of Hong Kong and Singapore.

Shanghai’s ports had 31.7 million tons in 2011, which went up in 2012 to 32.58 million tons. Singapore had 31.64 million TEUs, whereas Hong Kong had 23.10 million TEUs (Knight & Ding, 2012). Shanghai has a geographical advantage over Hong Kong, which has favored its development into the biggest and prosperous port city. It is flanked with the ocean and rivers, which provides the natural foundation for its development. It is well linked to other locations of the country, which makes it one of the main towns in southeast China.

Shanghai is positioned halfway next to China’s eastern coastline, and on the eastern tip of Yangtze River Delta. In the north, it borders Yangtze River’ estuary; to the south, it borders Hangzhou Bay and to the west, it borders Zhejiang and Jiangsu Provinces. It also borders the Huangpu River to the west. This means that the port has the capability of handling many cargo ships, as compared to Hong Kong, which is evident in the high tonnage it reported compared to Hong Kong (Cai, 2010). One of the key policy changes that will enhance the success of the Shanghai free trade zone is the free convertibility of the yuan (Gamble, 2013).

The yuan has been a tightly controlled currency, which had been restricted in the global market unlike the other power currencies. The free convertibility of the yuan will encourage more investors in the Chinese economy. For example, organizations registered in the zone will have