THERE has been a lot of speculation that the emergence of the China (Shanghai) Pilot Free Trade Zone may dent Hong Kong’s longstanding role as a gateway to the mainland for international investors. But that doesn’t look likely in the short term.

China is using the new free trade zone to trial further deregulation of the nation’s financial services, where restrictions have been one roadblock in Shanghai’s goal of becoming an international financial center on par with Hong Kong.

Since the inauguration of the zone last September, a string of financial reforms has been announced, freeing up interest rates, expanding cross-border use of the yuan and promoting yuan convertibility under the capital account.

In February, China’s central bank fully liberalized the interest rates on foreign-currency deposits in the zone, laying the foundation for the deepening of interest-rate liberalization nationwide.

The central bank has also clarified rules for companies in the zone to borrow yuan from offshore. Third-party payment companies have been allowed to settle payment in yuan for transactions between foreign e-commerce websites and domestic companies and individuals.

Meanwhile, domestic and foreign banks have launched a yuan cross-border pooling solution for their clients in the zone. It allows multinational companies to “sweep” yuan freely between onshore and offshore entities, helping them optimize cash management efficiency.

Some industry watchers have called these moves the most aggressive financial deregulation in China in more than a decade.

However, financial liberalization comes with high risks. For many foreign companies, especially multinationals with regional headquarters in Hong Kong, caution prevails. They want to be assured that effective risk control mechanisms are in place in the zone, market watchers said.

“Unlike most individual investors and small companies that are concerned about whether the zone will offer them tax sweeteners or access to cheaper capital in overseas markets, multinational firms are more interested in financial reforms that may bring down transnational operating costs,” Ella Xu, account manager of a Shanghai-based business consultancy firm, told Shanghai Daily.

Xu said most of her firm’s multinational clients are hesitant to dip their toes into untested waters, preferring to wait and see where these financial reforms will lead.

Although the central bank has focused on risk management by ordering banks to clearly identify companies when opening accounts, set deposit rates at rational levels and report abnormalities, concerns persist that financial openness in the zone may lead to turbulence in capital markets.

Xia Bin, honorary director of the Financial Research Institution of the Development Research Center of the State Council, told a forum several weeks ago that even small amounts in the free flow of capital in and out the zone could trigger arbitrage because China’s exchange-rate reform is still not fully in place yet.

Different financial policies in the zone will lead to interest-rate and foreign-exchange spreads between the zone and the domestic territory outside the zone. The gaps could breed arbitrage and speculative activities that would add difficulties to monetary adjustment and impact the macro balance, Xia said.

“Companies should be prepared to react to the potential risks of massive cross-border capital flows and exchange-rate fluctuations as the zone gradually opens,” Lam Wai Chung, vice chairman and president of Hang Seng Bank (China), said in an earlier interview.

Lam said regulatory measures should be adjusted to adapt to a freer market and new instruments should be introduced to tame fluctuations.

“The free trade zone would be a nice testing ground for new rules of the game,” Lam said.

Currently, financial regulators and several banks are building a separate account system in the zone that will allow free transactions between accounts in the zone and accounts overseas. Money transfers between free trade zone accounts and domestic accounts will still be regulated.

Dai Haibo, deputy director of the zone’s management committee, said the account system should be launched by the end of June.

Apart from financial limitations, there are doubts regarding the zone’s ability to build a trustworthy legal system, which is one of the biggest advantages of Hong Kong.

“Personally, I would choose Hong Kong over Shanghai because I have more trust in a British-based legal system,” said Liu Qianwen, China country manager for Drewry Shipping Consultants Ltd.

“If this free trade zone helps build a reliable legal system, it would be a major success,” Liu said. “But it’s only an experiment. I think maybe the impact will be limited.”

Xie Yaxuan, head of macroeconomic research with China Merchants Securities Co, shares that view. He said studies show that mature financial markets, such as Singapore, London and Hong Kong, mainly distribute in countries and regions with Anglo-American legal systems, which is relatively complete in terms of contract enforcement and private property protection.

“This cannot be easily copied,” Xie said.

Xie also said Hong Kong’s advantages in terms of an open free trade system, financial and services support facilities and an international talent pool make the city irreplaceable.

The Shanghai zone also faces increasing competition from a number of domestic cities that are keen to set up their own free trade zones.

As investors expressed disappointment at slower-than-expected progress in the Shanghai zone, provinces such as Zhejiang, Shandong, Liaoning, Henan, Fujian, Sichuan, Guangxi and Yunnan, and cities such as Suzhou, Wuxi and Hefei all said setting up free trade zones in their jurisdictions is high on their priority list for 2014.

Other economic zones in China have also been stealing some of the limelight from Shanghai. Last month, the Ministry of Finance and the State Administration of Taxation jointly released tax preferential policies for the Qianhai Economic Zone in Shenzhen, the Pingtan Experimental Zone in Fujian and the Hengqin area in Zhuhai, lowering the corporate tax rate for qualified companies in the three zones to 15 percent from 25 percent.

There were initial expectations that the Shanghai free trade zone would offer a similarly low corporate tax, but those hopes were dashed when the zone’s regulator said the focus is on institutional reforms that can be rolled out nationwide rather than on providing preferential policies.

The central government has allowed Shanghai three years to carry out experimental reforms in the new zone, but nationwide competition is pushing it to move faster.

The zone’s Dai said the first group of reforms achieved in the zone would be promoted to other areas of China by September, the one year anniversary of the zone.