The Chinese government officially inaugurated the Shanghai pilot free trade zone (FTZ) on Sunday with a desire to nurture changes through experiments in a wide range of areas.

Testing of a convertible yuan, wider opening of 18 service sectors, a negative list approach in governing foreign investment, among other initial steps, are expected to unleash economic potential in the 29-square-km zone in the coming two to three years.

After trial operation, the successful experiences will be applied in other parts of China and help escalate the Chinese economy to a new level in the face of a slowing domestic economy, according to government officials and experts.

Broad reform

Under a general plan unveiled Friday, China will create conditions to test yuan convertibility under the capital account, market-set interest rates and cross-border use of the yuan in the zone, which are key areas of the long-pledged, high-profile financial reform

But J.P. Morgan China economist Zhu Haibin suggested looking at the bigger picture, saying that reform in the FTZ concerns not only the financial sector.

"Reform in the zone covers multiple areas of trade, investment, finance and administrative management, with its core being a re-definition of the relationship between the government and the market," Zhu said.

Among many other things, the plan proposed that a "negative list" approach will be explored, allowing more freedom for foreign investors setting up business as they will operate according to a "not-to-do list" instead of a "to-do list."

Analysts said this approach chimes with the central government's persisting efforts this year to streamline administrative approval procedures and reduce government intervention in the market.

Ahead of a key plenary meeting of the Communist Party of China Central Committee scheduled for November, the FTZ plan also heightened speculation over the highlights of the upcoming reform agenda that will set the tone for China's economic development for several years to come.

"The significance of the FTZ lies in China having been exploring a path of further reform and opening up, in the service sector and in investment," said Wu Xiaoling, director of the Lujiazui International Finance Research Center under the China Europe International Business School.

The key to developing the Shanghai FTZ is that more attention should be given to institutional establishment that could be replicated nationwide, rather than implementing favorable policies at local levels, Wu said.

Energizing economy

The pilot FTZ is expected to test ways to reinvigorate the Chinese economy, which has slowed for two straight quarters.

Zhuang Jian, an economist at the Asian Development Bank, said reform plans adopted in the zone are in line with the central government's overall macroeconomic policy -- seeking steady growth, conducting structural readjustments and deepening reform.

According to Zhuang, wider opening of 18 service sectors to foreign competition, ranging from banking, health insurance, telecommunications, legal services to cultural activities, will attract foreign expertise and lead to better practices.

"It will tap the potential needs of Chinese consumers and stimulate spending," he predicted.

Expanding domestic demand is considered the most important aspect in economic restructuring, said Chinese Premier Li Keqiang at the Summer Davos Forum earlier this month.

China is making efforts to reconstruct its economy and seek a self-sustaining growth pattern based on domestic consumption instead of export and government-led investment.

The Chinese economy has moderated from a double-digit growth speed to what it calls "medium to high-speed" growth. It expanded 7.5 percent in the April-June period, down from 7.7 percent in the first three months of 2013 and 7.9 percent in the final quarter of last year.

Yet the government has refrained from launching a short-term stimulus package, staying committed to expanding domestic consumption through further reform and opening up to address underlying problems.

Zhuang said reform efforts in the financial sector are also vital to economic restructuring.

"A convertible yuan and deposit rates liberalization, which are planned in the Shanghai FTZ, will improve the country's financial infrastructure and better serve the real economy," he said.

Financial services to small and medium-sized companies will also be improved, added the Asian Development Bank economist, as eligible foreign-funded financial institutions will be allowed to team up with qualified private banks to establish joint-ventures in the pilot zone.

Testing ground

Although the zone only covers just under 29 square km in Shanghai's Pudong district, analysts are expecting that the scheme, if proving to be a success, will be rolled out across many other major cities nationwide.

As Jian Danian, deputy director of the zone's managing authorities, has put it, the country aims to build the Shanghai zone as a test bed for pushing forward reforms and opening the economy wider.

"We are seeking institutional arrangements that can be copied and rolled out nationwide," Jian said.

The name itself, the China (Shanghai) Pilot Free Trade Zone, has delivered a clear message that the pilot scheme is not only a plan to speed up Shanghai's transformation and development, but also part of China's national development and a new round of reform and opening-up strategy, according to Jian.

The focus of the Shanghai zone program is "pilot," which indicates the government's intent to use it as a platform for experimenting with a wide-ranging series of reforms, said Chang Xiuze, a researcher at Tsinghua University's National Center for Economics Research.

Many analysts have likened the Shanghai zone to Shenzhen, once a small fishing village next to Hong Kong but transformed when it became a special economic zone for testing China's market reforms in the 1980s.

The Shenzhen experiment proved a great success, helping make China the world's factory and its second-largest economy.

Now, with the country's economic growth slowing and its export engine sputtering as costs rise, analysts are united in viewing the Shanghai zone as a key to the country's next economic success. Endi