Shanghai Free Trade Zone

THE State Council passed a comprehensive plan to set up a free trade experiment zone in Shanghai. On August 26， the Standing Committee of the National People’s Congress， China’s top legislature， discussed the plan and its ramifications on fiscal policy. And on September 29， the Shanghai Pilot Free Trade Zone hung out its shingle.

Chen Bo， deputy director of the Free Trade Zone Research Center at Shanghai University of Finance and Economics， pointed out that this is the first trial free trade zone in China. Should it prove a success， the model could be adopted across the country.

Establishing a presence in the zone would be beneficial for foreign companies competing in the Chinese market as it continues to mature. Many companies have already displayed an interest in gaining access to the FTZ. Some have been granted tentative approval.

The Shanghai FTZ is made up of three extant bonded areas – Yangshan， Waigaoqiao （including its logistics park） and Pudong Airport. In total it covers 28 square kilometers. Many companies already have operations in the regions； office and industrial spaces still available have shot up in price.

Fast Lane to the Chinese Market

Foreign investors in the Shanghai FTZ are not required to seek government approval before setting up shop as long as they operate outside of industries on a “no-go” list. The aim of the FTZ is to establish the practice of postentry supervision and pre-entry “no-go”list management as a new investment access and management system， in place of the old government examination and approval system， reiterated Wang Xinkui， director of the Counselors’ Office of the Shanghai Municipal Government at the Chinese Economists 50 Forum on August 10.

The “no-go” list is a way of telling industry and business what not to do， rather than what to do.

Such lists are common practice nowadays， and are an innovative way to facilitate global trade negotiation and regulations. They had been adopted in 77 countries at the time of writing.

Over the years China has been overseeing foreign investment using the Guidance Catalogue of Industries for Foreign Investment drawn out jointly by the State Development and Reform Commission and the Ministry of Commerce. The document specifies in which industries foreign investment is encouraged， limited or prohibited.

Liu Qing， an assistant professor with the University of International Business and Economics， remarked that the“no-go” list implies a change in supervisory practices. It should simplify the administrative procedures for foreign investment inflows， rein in discretionary state power and result in more transparency and less uncertainty. The change of policy will attract foreign investment and improve the efficiency of business operations， he added.

The reforms mean foreign companies in the FTZ go through the same procedures in industrial and commercial registration， company establishment and alteration， project management and administration as domestic companies.

Liu Qing said that from a policy perspective， the groundbreaking reforms were like gnawing on hard bones. The difficulty is at the get-go； once the surface reforms have been cracked， the fruits of FTZ dynamism will be accessible.

Wang Xinkui said the hardest part of the reform process was the examination and approval system. With new practices underway， China will be closer to following international best practices.

One difficulty for the experimental FTZ is its potential conflict with current Chinese laws. In order to balance the imperative for reform with legal realities， the State Council passed a resolution on August 16 requesting the Standing Committee of the National People’s Congress to empower it to suspend extant laws and regulations in the Shanghai FTZ that oversee the establishment and operation of foreign companies， joint ventures and Sino-foreign cooperative enterprises.

“Opening-up” Shifting Up a Gear

The FTZ means greater benefits for companies present. A materials processing enterprise， for instance， currently has to pay taxes on imported materials and can only get a tax refund after exporting the finished product. For high-volume， small-margin enterprises， this results in cash-flow pressure because such a process often entails a wait of several months for the tax rebate. Informed sources say import tariffs will be eliminated for processing companies， and manufacturers enjoy a tax rate below 15 percent. Such measures should encourage businesses by reducing costs and red tape.

An official from one bonded area in Shanghai remarked that processing， international trade， logistics and related industries are encouraged in the zone， and more and more preferential policies are imminent.

Wu Jingfei， an associate professor with the School of Economics at Shanghai University， told China Today that the FTZ would enjoy favorable opening-up policies with fewer limitations compared with Shanghai’s other bonded areas.

At present， policies regarding tariffs in China’s bonded areas are still not entirely in line with the goals of “opening up.”The FTZ changes this by relaxing tariff policies and exempting designated areas from burdensome customs regulations.

“The FTZ takes Hong Kong as its model in supporting processing trade companies，” the aforementioned official added. The aim is to support industry and buffer the impact of the rising labor costs on the companies by granting them preferential tax policies.

In recent years， the rising cost of labor and labor inputs has eroded many foreign companies’ profits in China. Liu Qing said that the establishment of FTZs like the one in Shanghai would help China win back its competitive advantage by reducing companies’ expenditure on administrative procedures and other regulatory hurdles. The result should be reinvigorated capital flows into the country.

Expanding Free Trade Zones

Xu Quan， deputy director of the Shanghai Municipal Office of Finance， remarked that besides the fields of investment and trade， the trial zone’s scope would cover aspects of the financial sector including the marketization of interest rate， free currency exchanges， fewer capital controls， accommodation of offshore business and other innovations. Compared with conventional bonded areas， FTZ finance will have a more open set of supervisory and administrative controls. Where bonded areas pursue commodities management， the FTZ would focus on enterprise management and ensure compliance with global norms on diversified trading. Policies regarding foreign exchange and tax are internationally competitive.

“Like a magnet” is how Liu Qing described the new Shanghai FTZ when asked how the zone would attract AsiaPacific businesses.

The Shanghai FTZ may adversely impact other free trade areas in the region， such as Hong Kong and Singapore. At present， a high proportion of foreign trade with China’s mainland passes through Hong Kong. That may change as the Shanghai FTZ comes online.

But Liu said that in the short term there would be little impact； time is still needed before the Shanghai FTZ operates as smoothly and efficiently as Hong Kong does.

More details about the FTZ will become available over the following months. When the details are released， other cities in China will follow suit with FTZ plans. Liu Qing points out that Tianjin， Nansha District in Guangzhou， Xiamen， Zhoushan and a number of other cities have already submitted tentative plans for setting up free trade zones.

Shanghai FTZ marks an important first step in ensuring the mainland enjoys continued economic prosperity. The next step will be ensuring this prosperity is enjoyed by inland as well as coastal areas.“Opening-up” started with， but doesn’t stop at China’s ports.