The Shanghai Municipal Government is working to take full advantage of an opportunity it cannot afford to miss. Construction of the free trade zone will be top of the city government's work agenda for the rest of this year. The government in August issued a 42-clause regulation to support the free trade zone by encouraging more innovation in the financial sector and giving small and micro-businesses better access to credit.

Lighting up the sky: An aerial view of Shanghai. [Photo / CFP]

Measures to support the Shanghai free trade zone are to be given top priority, Shanghai Mayor Yang Xiong said on July 25 as he delivered his half-year government work report at the Expo Center.

Shanghai's GDP expanded 7.7 percent from a year earlier to 1.02 trillion yuan ($164.5 billion) in the first half of 2013, according to the Shanghai Statistics Bureau.

Surpassing Hong Kong?

"The most valuable part of the free trade zone would be more innovation and loosening of controls in the financial sector," said Chen Wenxing, a financial commentator. "For example, foreign capital may be allowed to establish banks in the zone; Chinese banks may be allowed to conduct offshore yuan trading; full-convertibility of the yuan, the Chinese currency, may be allowed on some conditions."

Mei Xinyu, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, said offshore financial businesses have the biggest potential in the zone. "It can help the globalization of the Chinese currency."

Analysts say loosening of those controls could strengthen the financial system and make it more efficient. The question then is: Will Shanghai pose a threat to Hong Kong's status as a global financial hub?

Hong Kong is a well-established loan syndication center servicing the funding needs of governments and corporations in the region and around the world. It also shares with Singapore the region's fund management and private banking businesses.

Liu Yuanchun, a professor from Beijing-based Renmin University of China, said Shanghai may change the course of the mainland's yuan internationalization by luring business from Hong Kong, currently the country's major yuan offshore trading center. "It's possible that as Shanghai's free trade zone plan proceeds, Hong Kong's status as the region's financial center might be weakened, but when that day may come is uncertain."

Billy Mak, an associate professor of finance at Hong Kong Baptist University, said the zone would definitely deal a blow to Hong Kong's offshore yuan business if it creates more business in yuan trade financing.

However, Feng Zhengzhou, President of the Shanghai Export Enterprise Association, is less optimistic.

"I don't think the Shanghai free trade zone will be any threat to Hong Kong, especially in the short run. The zone is like a fetus, not yet independent of the mother country, while Hong Kong has become a very mature free trade port over many years."

Wang Guowen, the Supply Chain Management Association's Chief Representative in China, agreed with Feng, adding that the Shanghai free trade zone, with only 28.78 square km, is more of an experimental spot for China to study how the country should further reform and open up to the world.

MOFCOM spokesperson Shen Danyang also said at a press conference that the free trade zone is aimed at accumulating experiences for China's further reform and opening up.

"It's totally unnecessary to worry about its negative impact on Hong Kong."