China to Test Free Trade Zone in Shanghai

SHANGHAI — China has taken another step toward loosening its capital controls and making its currency more freely convertible by approving the creation of a new kind of free trade zone here.

China’s State Council, or cabinet, said it was establishing a pilot zone in Shanghai to test some of the government’s financial overhauls, including interest rate liberalization and full convertibility of China’s currency, the renminbi, according to reports Thursday in the state-run news media.

Analysts say the free trade zone will not just promote interest rate liberalization and currency convertibility but will also allow “financial product innovation” and the raising of money abroad or investment in foreign stocks by corporations.

Since taking office this year, Prime Minister Li Keqiang has been promising bold changes aimed at overhauling the economy and improving the nation’s global competitiveness.

In May, a State Council meeting presided over by Mr. Li said that by the end of the year the government would outline a plan for full convertibility of the renminbi and make it easier for Chinese individuals to invest. Still, many analysts say they believe that China’s currency will not be fully convertible until 2015 to 2018.

“The State Council expects this experiment as an essential step towards upgrading China’s economy,” Qu Hongbin, an economist at HSBC in Hong Kong, said in a report on Thursday. “It also expects the pilot’s eventual national rollout.”

It is unclear exactly how the free trade zone would operate, but businesses and traders in the zone would probably be more free to import and export goods without customs approvals, and to convert foreign currency into renminbi more freely.

The approval of the free trade zone is a lift for Shanghai, which in 2009 won State Council approval to become a financial center to compete better with Hong Kong, London, New York and Tokyo.

Although China has the world’s second-largest economy, after that of the United States, the government maintains strict controls over capital flows and cross-border investments. It also has tight control over interest rates.

The government does that, in part, to guard against perceived threats from international currency speculators and to prevent huge inflows or outflows of money from rocking the banking sector and the economy.

But the government is moving ahead with plans to integrate with the global economy more fully by loosening controls over interest rates and cross-border trade and investment deals.

Analysts say loosening of those controls could strengthen the financial system and make it more efficient.

The overhauls could also make it easier to trade the renminbi, setting the stage for it to rival the dollar some day as a reserve currency. The government controls its value, and beginning in 2005, Beijing began allowing the renminbi to strengthen against a basket of other major currencies, including the dollar.

Analysts say the experimental zone is another move toward allowing the global financial markets to determine to value of the renminbi, also known as the yuan.

After years of spectacular economic growth, China’s economy has been showing signs of weakening this year, and economists are warning about looming risks in the banking industry.

Shanghai, a city of 20 million, already has major ports and transportation hubs, and it is setting its sights on becoming a global logistics center. In 2005, Shanghai opened the first phase of the Yangshan Deep Water Port, which could eventually become the world’s largest shipping container port. The facility, projected to cost $18 billion, is on an island that is reached by a bridge that stretches 20 miles across the sea.

A version of this article appeared in print on July 5, 2013, on page B3 of the New York editionwith the headline: China to Test Free Trade Zone in Shanghai as Part of Economic Overhaul.