New Shanghai Free Trade Zone: an Analysis

Being an isolated “Kingdom under the Heavens” is the one thing – but the drive to get profits is another. Through its long history, China has employed many measures to promote international trade, and one of the most frequent is opening a certain area for foreign companies. Thirty years ago the first Special Economic Zones were open – now it is the time for Free Trade Zones.

Shangjhai new zone

China has again attracted the world’s attention by proclaiming the opening of the free trade zone in Shanghai. On 29th September the Shanghai Free Trade Zone, which covers 28 square kilometers of the commercial Pudong district, will open for business. The new zone will contain the existing bonded zones – Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone. The area of previous Waigaoqiao FTZ was three times smaller.

Free Trade Zone

One of the most important persons, who stand behind the project, is the Chinese Prime Minister Li Keqiang. He personally advocated the idea in the front of the State Council, he also managed to curb the criticism of financial regulators: for example, China Banking Regulatory Commision was very skeptical about international banks entering the Chinese financial market. Li Keqiang himself is an economist by education, known for his open-mindedness, as far as business is concerned. Media reactions for his flag project were rather positive, but far from enthusiastic. We should carefully consider what the opening of the new free trade zone means to the foreign business, bearing in mind that we cannot tell for sure what the rules will look like in detail.

Overcoming the obstacles

China is a big market and every foreign company knows that it must cooperate to get its slice. Foreign investors have endured arbitrary law regulations, elevated seed capital requirements, currency risks and various limitations (in some fields of economy, such as a car manufacturing, the foreign investor must find a Chinese partner and establish a joint-venture company, in some other only the Chinese companies are allowed). Chinese institutions, such as banks, are also restricted in their activities, which opens a space for non-legit money lending and lowers the level of mutual trust. Chinese governmental institutions have, for a long time, followed the principle of “everything which is not allowed is forbidden” – it is very deeply rooted in the Chinese hierarchal society, in which a cautious official would avoid any risky action, to avoid possible consequences and criticism from his superiors. The city of Shanghai was constrained in its development by the mixture of all the factors described above, and we should also mention Hong Kong, the biggest competitor, chosen by many foreign companies as a place for their head offices. Hong Kong would not, however panic-stricken its media commentators would sound, be surpassed by Shanghai in its role of cross-border financial hub. So, as some of the experts claim, the effect of establishing of FTZ may have only local impact on Shanghainese economy.

The Trial Run

Another important aspect worth considering is the Chinese government approach towards reforms: and the way of how the new solutions are being tested. Due to the official reports, the details of the reform guidelines in the FTZ would not come along with the official launch of the FTZ at the end of September but will be gradually released before the end of this year and into next year. It opens a wide window for last-minute changes, the thing so hated by everyone doing business in China, but also

reminds us of many other reform programs, which were carried out in a similar way. To check how the new law solutions work in the real life, the government often specifies a restricted area in which they come into force. That was the case of Special Economic Zones (the first one was open in Shenzhen, later this solution was adopted elsewhere), that is the case of new visa policy. It seems likely that the government is doing this “trial run” in Shanghai to find out how the FTZ will affect local economy and whether is it profitable enough. If the Shanghainese FTZ will succeed, similar zones will be opened in other cities, which may be a major step in the development of China.

What to expect?

China governmental circles still follow a restrictive information policy, so we cannot tell for sure how the new free trade zone will look like. However, some of the solutions were already made public. Several laws referring to the foreign investors will be suspended and the number of approval procedures will be reduced. Contrary to the “everything which is not allowed is forbidden” way of thinking mentioned above, the FTZ management will clearly specify the undesirable activities, everything not on the list will be allowed.

Shanghai Free Trade Zone will enable foreign banks to enter China soil; those banks may offer many services that previously were not offered. The FTZ may become an offshore financial center, offering corporate and commercial services for foreign companies.

What is more than possible, the opening of the FTZ will boost up the local service sector. By now, every international famous brand had already opened its shop in Shanghai, but in most cases the local people would rather go to Hong Kong and buy luxury goods cheaper, without luxury tax. The FTZ will most likely become a shopping paradise, attracting clients from Mainland China and other countries.

The Internet, which is the main tool of global communication, was for a long time under strict control in China and for example Facebook and Twitter webpages were blocked. Anonymous Chinese government sources have informed that the ban will be lifted in the Shanghai FTZ, so that foreign businessmen will be able to bypass the so-called Great Firewall. Nobody knows though whether the Chinese citizens, visiting or living in the zone, will be able to use those webpages.

Summary

If China is the “Factory of the World”, than, clearly, Shanghai is its gateway. The city’s port is handling around 30 million of TEU yearly, making it the busiest container port in the whole world. The factories located in Jiangsu and Zhejiang provinces feed it with an unending stream of goods, which are being transported to every corner of the globe. The Chinese authorities surely want to take the advantage of this and turn Shanghai into a world financial center, but there are many problems that must be solved before. Some people say that China, the world’s second economy, still has three world banking system – this opinion may be exaggerated, but there is some truth in it. Another problem, which is rather impossible to overcome, is the Chinese officials’ way of thinking. Three thousand years of imperial history have already shaped this bureaucratic and often corrupt caste, only time will tell how they will manage to cope with the rules essential for the existence of the free trade zone, such as transparency and fairness.

Sources:

http://www.businessweek.com/articles/2013-09-20/shanghais-new-ftz-trade-reform-breakthrough-or-hype
http://www.cnbc.com/id/101042591
http://www.chinadaily.com.cn/china/2013-07/04/content_16721336.htm
http://gb.cri.cn/42071/2013/07/16/6851s4183703.htm
http://news.xinhuanet.com/english/indepth/2013-07/20/c_132557369.htm
http://www.china.org.cn/business/2013-09/18/content_30063351.htm

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