In the spring of 2009, China’s State Council announced its plans to transform Shanghai into an international financial center by 2020. This announcement recalled the historic establishment of the Special Economic Zone (SEZ) in Shenzhen three decades ago that transformed the city from a small fishing village into a bustling metropolis that is now one of the world’s fastest growing cities. Shenzhen’s success is testament to the fact that Deng Xiaoping was on the right side of history; but will China be able to pull off the same strategy twice in a row?

The Shanghai Free Trade Zone (SFTZ) was designed as a preliminary trial to experiment with the financial reforms that the Chinese Communist Party (CCP) considered necessary for Shanghai’s 2020 transformation. Unfortunately, the SFTZ has so far failed to live up to its original ambition. Reforms to the financial services sector have been few and far in between; instead, change has been concentrated in less controversial sectors, such as manufacturing. The list of prohibited commercial activities continues to be much too long. Finally, Shanghai’s businesspeople have expressed confusion with the rules of the new Zone, and the question of what exactly is allowed continues to elude many.

So why has the pace of reform been so cautious? Ultimately, the main factor inhibiting the necessary reforms is the Party’s fear of losing control of over economic—and therefore social—stability. This fear is founded upon the outcome-oriented nature of the social contract the Party itself wrote and promoted.

In 2004, the Chinese White Paper on human rights declared that “the Chinese government continues to put the safeguarding and promotion of the people’s right to subsistence and development at the top of its agenda.” In interpreting the White Paper, theorists such as Elizabeth Perry have long argued that the legitimacy of the CCP is contingent upon not only the maintenance of a minimum standard of life, but also the constant elevation of that standard; in the event that the state fails to carry out these two basic tasks of governance, regime legitimacy is severely compromised.

The internationalization of Shanghai as a financial center poses this very threat. Recent history has demonstrated to dramatic effect the reality that greater integration into the international financial order comes with a serious set of macroeconomic risks. These risks apply to all states, but some are better at sustaining it—at least politically—than others. A report from the Centre for European Policy Studies concluded that while European citizens’ trust in EU institutions fell significantly after the 2008 financial crisis, confidence in national governments has actually risen. Because the CCP has staked its credibility on outcomes, however, Chinese citizens are unlikely to give their government the same benefit of the doubt. For this reason, the CCP has historically striven to maintain a certain degree of economic autonomy through risk-averse international policies, an attitude that has sometimes served it quite well. Because its financial services industry was closed to the world, China had only limited exposure to the sub-prime mortgage assets that led to the fall-out that plagued much of the global financial order in 2008. This policy of caution has strongly characterized official CCP opinion, as Liu Mingkang, the chairman of the China Banking Regulatory Commission once wrote, “In an increasingly interconnected world, financial risks now spread like pandemics. One of the effective ways to prevent risk contagion is to set up firewalls between banking and capital markets.” Liu’s rhetorical characterization of financial risks as disease is compelling; in this view, to support political processes that strengthen Shanghai’s ties with the rest of the financial world is to deliberately expose its economy to uncontrollable risk and to bring the contagion inside of China’s borders.

In the modern economy, capital flows to the most predictable regulatory environment. An essential part of the strategy for Shanghai 2020 must therefore by the adaptation of China’s legal and regulatory system to international standards.

Shanghai 2020 and its closest historical parallel, the establishment of the SEZ in Shenzhen, shared many of the same fundamental goals. Yet in other ways, Shanghai 2020 threatens the core tenets of what Deng Xiaoping passed off in Shenzhen as “socialism with Chinese characteristics.” The nature of the CCP’s challenges has changed drastically since Shenzhen. Deng Xiaoping was able to pursue market capitalism in Shenzhen while simultaneously shielding authoritarianism—and thereby Party security—from liberalization; unfortunately for the CCP this strategy will not work a second time. In the modern economy, capital flows to the most predictable regulatory environment. An essential part of the strategy for Shanghai 2020 must therefore by the adaptation of China’s legal and regulatory system to international standards. The South China Morning Post put it most aptly: “China will be left behind if it does not change with the times.” If this is the case, then the erosion of “Chinese characteristics” appears to be a necessary part of reform.

Forty years ago, the notion of an international financial center in Shanghai would have been not only absurd, but counterrevolutionary. Similarly, at the time it was announced, the Special Economic Zone in Shenzhen incited intense disagreement on both sides ofthe CCP leadership. During his now-legendary Southern Tour, Deng Xiaoping inspired his countrymen, then mired in factional inertia, to action, “We should be bolder in carrying out reforms and opening up to the outside world and in making experimentation...We should not act like a woman with bound feet. For what we regard as correct, just try it and go ahead daringly.” To bring the vision of Shanghai 2020 into reality, CCP leaders must do away with the fear of instability and act with equal conviction.