The Impact of the Pilot Free Trade Zone on Regional Financial Development

• Published date: 01 September 2022
• Author: Lihui Wang,Zhihong Liu,Huailong Shi
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/cwe.12441

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 154–184, Vol. 30, No. 5, 2022

154

*Lihui Wang, Lecturer, School of Management Science and Engineering Institute of Free Trade Zone, Nanjing

University of Information Science and Technology, China. Email: wanglihui@nuist.edu.cn; Zhihong Liu,

Associate Professor, School of Public Finance and Taxation, Nanjing University of Finance and Economics,

China. Email: liuzh6789@126.com; Huailong Shi (corresponding author), Lecturer, School of Management

Science and Engineering, Nanjing University of Information Science and Technology, China. Email: hlshi@

nuist.edu.cn.

The Impact of the Pilot Free Trade Zone

on Regional Financial Development

Lihui Wang, Zhihong Liu, Huailong Shi*

Abstract

This paper focuses on the Shanghai pilot free trade zone (FTZ). It investigates the

effect of the FTZ policy on regional financial development. The synthetic control

method employs quarterly data from 2005 to 2019 at the provincial level to investigate

counterfactual states before and after the pilot FTZ was set up. First, our results

reveal that the Shanghai pilot FTZ had a positive influence on the following four

variables proxied for regional fi nancial development: (i) the scale of regional fi nancial

development; (ii) the effi ciency of indirect fi nancial development; (iii) the effi ciency of

direct fi nancial development; (iv) the structure of fi nancial development. Second, our

results found that the policy eff ects that began to emerge from 2014 onwards exhibited

a steadily increasing trend. As a result, the four proxy variables have increased by

(i) 197 percent, (ii) 202 percent, (iii) 9.4 percent, and (iv) 15.2 percent, respectively.

That is, the scale of regional financial development and the efficiency of indirect

fi nancial development have increased more than the other proxy variables.

Keywords: counterfactual, fi nancial development, pilot free trade zone, synthetic control

method

JEL codes: F13, F36, F65, R11

I. Introduction

As a “national experimental fi eld” with system reform at its core, the pilot FTZ is not

only an important strategy responding to the global economic and trade development but

is also necessary to build a new open economic system. Its goals include many aspects,

such as accelerating the transformation of government functions and the reform of the

©2022 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Impact of Pilot Free Trade Zone on Financial Development 155

administrative system, transforming the model of economic growth through institutional

innovation, and optimizing the industrial structure by the expansion of the opening-up

process. It is worth exploring experiences that can be replicated and applied in other

areas in the country. This will further force the reform of the economic system, which

helps to build an open economy compatible with globalization. As one of the most

important objectives of the establishment of the pilot FTZ, financial innovation has

experienced rapid reform and development.

We focus on the Shanghai pilot FTZ in this paper. Since its establishment, the

reform of the financial system no longer relies solely on fiscal policies and taxation

or other preferential policies to provide an impetus for innovation. Instead, by virtue

of a series of measures such as establishing an international market for financial

transactions, expanding the scope of cross-border use of the renminbi (RMB), and

setting up a free trade account system, it has attracted an increasing number of

domestic and foreign fi nancial institutions (Chen et al., 2020). On the very fi rst day of

the establishment of the Shanghai pilot FTZ, eight Chinese banks, two foreign banks,

and one financial leasing company, a total of eleven financial institutions, relocated

to Shanghai. At the end of 2014, the Lujiazui Financial Area was included in the pilot

scope of the Shanghai pilot FTZ. This is conducive to further investigation and stress

testing of the institutional innovation. On October 29, 2015, the Shanghai Municipal

People’s Government, the People’s Bank of China, the State Administration of Foreign

Exchange, and other departments jointly issued Further Promoting the Pilot Program

of Financial Opening and Innovation in China (Shanghai) Pilot Free Trade Zone to

Accelerate the Construction of Shanghai International Financial Center, referred to as

Forty Rules of Financial Reforms.1 The purpose of the Forty Rules of Financial Reforms

is to accelerate the convertibility of capital accounts, the cross-border use of RMB,

the opening of the financial service industry, and the construction of an international

fi nancial market, continuously improve fi nancial supervision and vigorously promote the

linkage between the Shanghai pilot FTZ and its construction as an international fi nancial

center. On February 14, 2020, five departments, including the Shanghai Municipal

People’s Government and the People’s Bank of China, jointly issued the Opinions

on Further Accelerating the Construction of Shanghai as an International Financial

Center and Financial Support for the Integrated Development of the Yangtze River

Delta, referred to as Thirty Rules of Financial Reforms.2 The implementation of Thirty

1For more detailed information, please refer to: https://www.shanghai.gov.cn/nw39346/20200821/0001-

39346_1100123.html.

2For more detailed information, please refer to: http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3971154/

index.html.