China's key financial centre Shanghai has received State Council approval to establish a trial free-trade zone within its surrounding area, serving as a test for some of the government's financial overhauls, including interest rate liberalisation and full convertibility of the renminbi, reported the China Daily on Thursday.

The new free trade zone, which will cover an area of approximately 28 square kilometres, will be the first free-trade zone within mainland China, incorporating the special custom zones of Yangshan Deep Water Port, Pudong Airport and the Waigaiqiao Port.

The project is expected to take more than 10 years to complete; and when done, "will provide world-class transport and communications facilities and a tax-free environment for domestic and foreign enterprises as a major hub of their supply chains in Asia," the China Daily said.

"The State Council expects this experiment as an essential step towards upgrading China's economy," told Qu Hongbin, an economist at HSBC in Hong Kong, to the New York Times. "It also expects the pilot's eventual national rollout," Qu added.

Though details on exactly how the free trade zone would operate is still unclear, businesses and traders in the zone are expected to be able to import and export goods without customs approvals, and to convert foreign currency into renminbi more freely.

The project, first conceived earlier in the year, is the first of its kind in China and is also one of Shanghai's major tasks for 2013.

"The free-trade zone could result in tremendous changes in the Asia-Pacific trade and finance sectors," said Yang Jianwen, a researcher at the Shanghai Academy of Social Sciences, to the South China Morning Post. "Shanghai officials are taking a long view and have started drawing up a blueprint for the city's development between 2014 and 2049."

"Shanghai is totally qualified as a free trade zone after attracting so many global companies to set up their regional and China head offices in the city, added Han Jun, the Party secretary of COSCO Logistics (Shanghai) Heavy Haulage Co. "But the policies and operating system still need to be improved," he warned.

In 2012, the trade volume of Shanghai's bonded zones represented more 3 percent of China's overall trade volume, or approximately $100 billion. The launch of a free-trade zone in Shanghai is in line with Beijing's efforts to finalise, by the end of this year, an operational plan for the eventual full convertibility of the yuan. Beijing is reportedly expected to liberalize the capital account by 2015.

Billy Mak, an associate professor of finance and decision sciences at Hong Kong Baptist University, also said the new free trade zone might challenge Hong Kong's status as an offshore yuan financial hub.

"If the Shanghai free trade zone creates more business in yuan trade financing, this would definitively deal a blow to Hong Kong's offshore yuan business," Mak said.

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