Wednesday April 24, 2019

CHINA OPENS FREE TRADE ZONE IN SHANGHAI

October 1, 2013

On  Sunday, China opened its first free trade zone on the mainland. The China (Shanghai) Pilot Free Trade Zone covers 29 square kilometers (11 square miles) of Shanghai, China’s financial and business center, as well as its most populated city. This new free trade zone (FTZ) will allow Shanghai to act as a testing ground for new economic reforms that have the potential to spread to additional cities.

The new free trade zone in Shanghai was unrolled with minimal fanfare and few tangible details available. There was a noticeable absence of high-ranking Chinese officials at the opening ceremony. In particular, Premier Li Keqiang, a strong supporter of the zone, and Vice-Premier Wang Yang, who many thought would officiate the ceremony, were notably missing. Despite the quiet ceremony, news outlets and analysts were abuzz about the free trade zone and its possible implications.

The Shanghai Pilot Free Trade Zone

This pilot FTZ comes at a time when China’s leadership is struggling to boost economic growth and is looking for measures to restructure China’s economic system in a way that encourages investment and trade. This new free trade zone created by President Xi Jinping’s government is reminiscent of Deng Xiaoping’s Special Economic Zones (SEZs). The SEZ opened in Shenzhen in 1980 was a pilot area for capitalism before Deng enacted his revolutionary sweeping economic reforms and opening-up.

According to China’s State Council, who announced the plan for the Shanghai FTZ in July, said, “The zone should function as a test field for reforms and an open economy that would provide experience that can be duplicated and promoted nationwide.” Commerce Minister Gao Hucheng, similarly stated that the FTZ “follows the tendency of global economic developments and reflects a more active strategy of opening-up.”

China will allow companies and financial institutions within the new zone to participate in areas that are under tight government control in the rest of the country. Instead of being merely an area with reduced tariffs, as some speculated. Shanghai’s FTZ is also going to involve wider financial liberalization. This includes relaxing interest rate regulations and allowing for easier currency exchange. Loan-to-deposit ratios and other requirements will be adjusted in order to entice strong financial institutions to open in Shanghai. The official registration process will also be simplified for foreign investors.

At least 18 different sectors will experience loosened regulations in the FTZ. Thirty-six Chinese and foreign firms have already been approved to operate in the free trade zone. Citigroup has already signed up as the first foreign bank in the FTZ. The new aspects of the free trade zone will be implemented gradually over the next three years. A translated version of China’s “General Plan for the China (Shanghai) Free Trade Zone” can be found on China Briefing’s website here.

According to China Daily, “the move seeks to free up the overloaded administrative approval system and introduce measures to encourage innovation and internationalization… Enterprises will no longer need to seek government approval for many of the things they want to do in the zone.”

A CCTV reporter summarized that “The highlight of the Shanghai FTZ is to create an open platform where foreign and Chinese companies can compete on a level-playing field.”

Restrictions in the Free Trade Zone

Beijing is using a ‘negative list’ approach to determining what foreign investment to allow in the new free trade district. This means that, apart from those sectors specifically cited as prohibited, foreign and domestic companies will be treated the same.

The ‘Negative List’ includes 16 restricted service sectors and over 190 specific measures. Among the sectors with restrictions are Real Estate, manufacturing, agriculture, education, health, construction, entertainment, retail, and finance. The specific measures ban gambling businesses, restrict telecommunications, and place limits on investment in hospitals and insurance, among other things.

The list does allow for joint ventures with Chinese companies in auto parts, railway construction, and shale gas exploration. It is also a temporary version that will be subject to future review and updates.

The Shanghai municipal government also announced that companies in the new FTZ will not be allowed to open internet cafes or operate online gaming services. They will also be prohibited from investing in new sites, online programs, and various other internet services.

In line with these internet restrictions, the Shanghai free trade zone will not include a freer internet with access to international sites blocked by the Chinese government, such as Facebook. Reports circulated last week that China would unblock its internet in the Shanghai FTZ but were quickly refuted.

Even the landmark items of the FTZ, the deregulation of interest rates and easy currency exchange, have their limitations. These pivotal aspects of a more open financial market will only be allowed “as long as risk is controlled.” But political will and economic necessity might be enough to reduce the potential harm caused by such a limitation. Also, despite expectations, the new zone will not include a reduced corporate income tax.

Potential Consequences for Hong Kong

The Shanghai Free Trade Zone is being extolled as the next Hong Kong or Singapore in global finance. At the same time, Beijing has been adamant in its assurances to Hong Kong that it will not be negatively affected by the new pilot zone.

Yin Zhonghua from China’s Ministry of Commerce said, “We feel there will be no negative impact on Hong Kong. Hong Kong has its own advantages that can be utilised within the free trade zone … It will promote Hong Kong’s prosperity and stability.”

Hong Kong’s political leader, Leung Chun-ying, is similarly confident that Hong Kong will continue to thrive. He said, “Hong Kong is a hub for top-notch financial professionals from both China and overseas… And one of the most important factors is Hong Kong’s rule of law.”

With many of the details of the free trade zone still murky, it is still unclear how revolutionary this free trade zone will actually be. China watchers will also have to wait over the next few years to see if a successful Shanghai pilot zone will lead to wider nation-wide reforms. Only time will tell if this economic experiment will be as groundbreaking as Deng Xiaoping’s.

 

For more information on the Shanghai Pilot Free Trade Zone, see the following news articles:

New York Times– “Experimental Free-Trade Zone Opens in Shanghai

The Diplomat– “Shanghai Opens Free Trade Zone; Internet Restrictions Remain

China Briefing– “Shanghai’s New Free Trade Zone – General Plan and Regulations

China Daily– “Shanghai opens free trade zone

The Telegraph– “Shanghai free trade zone launched in major economic pilot scheme

Tech in Asia– “Shanghai’s new free trade zone bans online gaming, internet cafes, and media business

CCTV– “Free Trade Zone highlights

Market Watch– “Is Shanghai Free-Trade Zone the real deal?

South China Morning Post– “Beijing reassures Hong Kong on Shanghai free-trade zone

Reuters– “Shanghai free trade zone no game-changer for Hong Kong, for now

China Briefing– “Shanghai Releases ‘Negative List’ for Foreign Investment in Shanghai Free Trade Zone

Asia News Network– “Shanghai FTZ publishes first ‘negative’ list

For Chinese language news on the new free trade zone, see the articles below:

Xinhua (新华网)– “上海自贸区成立对香港并不构成“零和博弈”

Wall Street CN (华尔街见闻)– “上海自贸区情况说明会直播

Xinhua (新华网)– “工商总局出台支持上海自贸区建设若干意见

IFeng(凤凰网)– “上海自贸区负面清单公布 禁开网吧博彩业

Xinhua (新华网)– “上海自贸区:探索中国改革路线图

People’s Daily (人民网)– “上海自贸区挂牌 温州商人自贸区组团抢地盘

CCTV (央视国际)– “刘利刚:上海自贸区意义重在创新

Compiled and edited by Ariane Rosen