Citigroup Inc. and Bank of China Ltd. announced they will participate in Shanghai’s free trade zone, the 11-square-mile experiment in more relaxed financial and investment controls that was inaugurated today.

The two banks were among the first to announce their participation in the zone, which opens Oct. 1 with the aim of creating a more efficient and open economic system, Commerce Minister Gao Hucheng said at an opening ceremony.

The area is a testing ground for free-market policies that Premier Li Keqiang has signaled he may later implement more broadly in the world’s second-largest economy. Li and President Xi Jinping are expected to seek support for plans to reduce the government’s hand in the economy and financial system at a Communist Party plenum this November.

"The market has considered the zone as Premier Li’s baby, and there will be big reforms," said Chan Yan Chong, an adjunct professor of management at City University of Hong Kong.

Companies with the word Shanghai in their names have led an 11 percent advance in the Shanghai Composite Index since June 27 on speculation they will benefit from the zone. At the same time, there are signs of wariness: Shanghai International Port (Group) Co. and Shanghai Material Trading Co. tumbled for a second day Friday after more than doubling this quarter.

Today’s ceremony was notable for Li’s absence, which may indicate that the government is trying to counter hype surrounding the zone, Chan said.

Attend Opening

"There was talk that Premier Li would attend the opening ceremony, but now that he didn’t, it seems the central government wants to cool down the market expectation," he said.

DBS Bank and Bank of Communications Co. also said they got regulatory approval to set up in the zone. A total of eight domestic banks and two foreign ones were given licenses to operate there, the Oriental Morning Post reported on its verified microblog account today.

The zone "is an important milestone in China’s efforts to build an international financial center and to reform and reinvigorate its economy for longer term economic viability," DBS Bank (China) Limited Chief Executive Officer Neil Ge said in an e-mail release.

An additional 25 companies, including units of Porsche AG, SAIC Motor Corp. and a trading unit of BNP Paribas SA were also granted licenses, the Morning Post said.

Finance Innovation

Important tasks for the zone include deepening financial-sector innovation and a liberalized service sector, Gao said. At a briefing later today, the zone’s executive deputy director, Dai Haibo, said it will transform the government’s role to supervision from making preapprovals. He said companies in the zone will get business licenses in as little as four days, down from 29 days previously.

The zone will also help simplify procedures for cross-border yuan use, Zhang Xin, Shanghai deputy director of the People’s Bank of China, said at the briefing.

China will allow trials of yuan convertibility in capital flows in the zone as long as risks are controlled, the State Council said in a statement Sept. 27. It didn’t elaborate on how the currency would be more easily exchanged for others.

Li mentioned the free-trade area in a commentary earlier this month to the Financial Times newspaper. He wrote that China would continue to streamline government and delegate power.

New Ways

"We will explore new ways to open China to the outside world, and Shanghai’s pilot free-trade zone is a case in point," he wrote. Li has called for the state to increase the role of the private sector to sustain growth.

Eighteen service industries will be liberalized including banking and shipping, with foreign financial institutions allowed to team with private-capital partners in China to set up joint-venture banks, the nation’s top decision-making body said. Wholly foreign-owned shipping-management companies will also be permitted, it said.

HSBC Holdings Plc analysts said in a Sept. 6 note that planned policies for the Shanghai zone would make it the "primary test ground of financial reform and innovation." The success of the area, "in turn, would provide renewed impetus driving forward China’s ongoing financial reforms," economists Ma Xiaoping and Qu Hongbin wrote.

Analysts are divided on whether the zone will have a noticeable impact on the broader economy.

Eight of 17 respondents to a Bloomberg News survey said the area will have no effect or a negligible impact on growth over the next five years, while eight said it will boost annual expansion by 0.1 percentage point to 0.5 point. One economist in the survey, conducted Sept. 18 to Sept. 25, said growth would increase by 0.5 point to 0.9 point. (Bloomberg)