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China’s Use of Special Zones to Pilot Reforms
+ Brandon Fuller
China continues to use the concept of a special zone to experiment with reforms. From an interesting article in this week’s edition of The Economist:
At the end of March officials announced that Wenzhou, a dynamic city in Zhejiang, would be named a “special financial zone” in which two pilot schemes will be introduced. First, informal moneylenders will be encouraged to register as private lending institutions free to operate with the blessing of the state. Second, private citizens in Wenzhou will be allowed to invest up to $3m each directly in non-bank entities abroad, without the need for a formal government intermediary.
The article mentions that the experimental reforms in Wenzhou are part of a broader attempt to liberalize the financial sector, coming in tandem with a recent decision to relax restrictions on foreign investment in China’s capital markets.
Wenzhou’s special financial zone is reminiscent of the special economic zones (SEZs) that China used to experiment with greater economic openness in decades past. The SEZs allowed the government to pursue liberalization on a limited scale, demonstrating the benefits of the policy shift in the special zones before rolling out similar reforms in the rest of the country.
The special zone concept has been applied in other contexts as well – in recent years, Chengdu served as a pilot for reform of China’s residency registration system. Historically, the system made it very difficult for rural-to-urban migrants to qualify for city residency permits (hukous) and the public services that such residents are entitled to. On the heels of the initial pilots, China is now making it easier to obtain residency permits in a number of additional small and medium-sized cities, improving options and flexibility for the many families looking to move from rural to urban areas (at this point, the reforms have not yet extended to China’s largest cities).
Perhaps China can use the special zone concept to tackle other social, political, and economic reforms. One issue that comes to mind is the the growing problem with traffic congestion in China’s largest cities. A “special transit zone” might demonstrate the benefits of a congestion pricing scheme, improving traffic flows and providing revenues for better public transit.