(Adds comments from Shanghai FTZ official)
By Lu Jianxin and John Ruwitch
SHANGHAI, July 1 (Reuters) - The Shanghai government has shortened its list of sectors where foreign investment is to be banned or restricted in the new Shanghai free trade zone (FTZ), but the changes show only a slight relaxation for foreign entrance into the Chinese markets.
A comparison shows that the Shanghai municipal government cut the 2014 "negative list" by 27 percent, to 139 items from 190 items in the one issued last year.
But the change was mostly the result of eliminating rules repeated throughout the document rather than eliminating major barriers to foreign investment in the zone, which was launched with much fanfare last year.
The "negative list" approach was originally touted as a major reform in itself, as previous lists had been full of gray areas that gave the government wide latitude to encourage or block investments on a case-by-case basis, seen as highly risky for foreign investors.
But the first version of the negative list was so long and comprehensive that the actually liberalisations it offered were seen as minimal. Most major multinationals have held back from substantive investments in the zone, even as commercial property prices there have seen heavy speculative inflows.
Even state media has publicly criticised the Shanghai government for being too conservative in its approach after promoting the FTZ as the most significant financial reform since a zone in Shenzhen helped launch China's Reform and Opening Movement in the 1980s.
APPROACH IS DEFENDED
FTZ officials, speaking at a press conference on Tuesday afternoon, defended their approach.
"The pilot FTZ, as a major part of reform and opening, on the one hand must bravely charge ahead and bravely try things and make its own reforms," said Dai Haibo, standing vice chairman of the FTZ management committee. But he added that reforms must progress "in accordance with the law" and with "institutional guarantees".
The Shanghai municipality does not have sole authority to implement financial reforms in the zone. It must seek approval from powerful central regulatory agencies including the China Banking Regulatory Commission, the central bank, the State Administration for Foreign Exchange, not all of whom always agree about how and when to liberalise the financial system.
"We are not in an era in which we can simply cross the river by feeling the stones," said Dai. "We can't just do whatever we think up."
The latest rules do offer some modest relaxations on foreign investment in real estate, financing and service sectors.
For instance, a provision that restricts foreign investment in the secondary property market and in real estate brokerages was revised to allow investment in these areas by foreign companies that have other lines of business.
A provision restricting foreign participation in investment banks, financing firms, trust firms and money brokers in the zone was removed, but it was replaced by a statement that "all investment in banking-style financial institutions must abide by existing regulations."
SUPERFLUOUS BANS REMOVED
In the service sector, all provisions related to bans on gambling and pornography have been abolished, but that does not mean that such businesses are now allowed, as such activities are illegal nationwide and dealt with by China's criminal code.
Some excessively detailed provisions, such as those related to how Hong Kong and Macao companies should invest in publishing, print material distribution and book chain stores have also been deleted, among other changes.
China set up the Shanghai FTZ in September to test ambitious plans for reforms in the country's policies on currency, interest rates, trade and industries.
The central government has permitted a limited capital account opening and eased restrictions on offshore lending in the zone. Beijing has said reforms in the zone are experiments, and the aim is to apply them to larger regions and eventually throughout the country.
In the first such broader application, China last week expanded a pilot program on foreign-exchange deposit rates from Shanghai's FTZ to all of Shanghai.
The full text of the 2014 list can be viewed on the FTZ's website, www.ysftpa.gov.cn. (Writing by Pete Sweeney; Editing by Richard Borsuk)