China's pilot free trade zone in Shanghai is not merely a place with specialregulations, but will pioneer reforms for the rest of China, officials have claimed.

Since the zone was established last September, the corporate community has tried to benefitfrom the promised international standard business environment, while authorities from other partsof the country who want their own FTZ have looked on both enviously and greedily.

At least 20 local governments have reportedly submittedproposals for similar zones, each claiming some "unique"strength.

This FTZ frenzy goes back to before the Shanghai zone waseven inaugurated. Last year, South China's Guangdongprovince announced an upgrade to one of its "specialeconomic development zones", calling it a "trade zone" andboasting of unrivalled connections with neighboring HongKong.

This year has seen other provinces maneuvering to join theparty: The coastal city Qingdao in Shandong province wantsto leverage its proximity to Japan and South Korea; Xiamenin East China's Fujian province says the same about Taiwan;Chongqing pleads that it will open up in China's wild widewest.

Despite all these proposals clogging the pipeline, authoritieshave given almost no indication that they intend to approveanother, similar zone.

At Tuesday's forum in Shanghai on financial innovation, officials from both the city and the FTZreiterated the implications of experiments in the zone, saying that they only make sense if bestpractices in the zone can be applied elsewhere in the country: The success of the FTZ liescreating a system that can be replicated elsewhere.

To ensure that success, Shanghai's deputy mayor Tu Guangshao said on Tuesday that activitiesin the zone must be aligned with the reform agenda for the entire country. Trials in the zone, Tuadded, should be carried out with prudence. A real difference will be made only whenbreakthroughs in the zone are extended to the rest of the country.

There is real concern that liberalization of existing controls may increase exposure to importedrisks, and effective mechanisms are needed to hold them at bay.

The People's Bank of China, China's central bank, has asked banks to set up separateaccounting units to handle cross-border capital transactions in the zone. Yuan transfers fromthese accounts to domestic ones is limited to current account transactions, loan repayments andnon-financial investment.

Louise Zhang of Deutsche Bank sees these conditions assatisfying legitimate capital needs while containingspeculation.

"It all comes down to one simple thing: no business activity inthe zone should serve speculative ends," she said. Thoughthere are still limits in many cross-border transactions, thereis enough wriggle room for day-to-day operations. "Weunderstand these limits are there mostly to weed outarbitrage," Zhang added.

Acknowledging the achievements of the Shanghai FTZ, ZhuXiaoming, executive president of China Europe InternationalBusiness School (CEIBS), said both financial and non-financial institutions surveyed by the school are still confused.Although facilitating cross-border capital flow has arousedinterest in innovation, companies in the zone are stillconcerned about crossing regulatory redlines.

He urged regulators to address what he called the"information asymmetry" between policy makers and market participants in the zone. Onesuggestion he offered is to introduce a third-party institution to run orientation programs forcompanies.

Jian Danian, deputy director of the Shanghai FTZ's administrative committee, said during aforum held by CEIBS last month that the FTZ is not just another development zone withpreferential treatment.

"(The FTZ) is where we test bold reform initiatives. If it works at the FTZ, we consider expandingit nationwide. If something doesn't work there, then we drop it. This is what happens in the FTZ,"Jian said.