Shanghai Free Trade Zone: an analysis

Being an isolated “Kingdom under the Heavens” is one thing – but the drive to get profits is another. Throughout its long history, China has implemented many measures to promote international trade, and one of the most frequent is opening a specific area for foreign companies. In the late 1970s, the first Special Economic Zones were opened in China. In the 21st century, the time of the Free Trade Zones has come, including Shanghai Free Trade Zone.

Shanghai Free Trade Zone

China has again attracted the world’s attention by proclaiming the opening of the free trade zone in Shanghai. On 29th September 2013, the Shanghai Free Trade Zone (SHFTZ), which covers 240.2 square kilometers of the commercial Pudong district, was opened. It was established to implement a strategy targeted at trade facilitation, financial services, investment management, and transformation of government functions.

At first, the FTZ included the existing bonded zones:

  • Waigaoqiao Free Trade Zone
  • Waigaoqiao Free Trade Logistics Park
  • Yangshan Free Trade Port Area
  • Pudong Airport Comprehensive Free Trade Zone.
Free Trade Zone

Then, it was expanded to include the following:

  • Lujiazui Financial and Trade Zone
  • Shanghai Jinqiao Economic and Technological Development Zone (formerly Jinqiao Export Processing Zone)
  • Zhangjiang Hi-Tech Park
  • Nanhui New City (Lingang New City)
  • Lingang Equipment Industry Area
  • Xiao Yangshan island (Yangshan Port)
  • the south side of Pudong Airport

A bit of background

One of the most important persons supporting the project was Chinese Prime Minister Li Keqiang. Li Keqiang himself is an economist known for his open-mindedness as far as business is concerned. He personally advocated the idea in front of the State Council. He also managed to curb the criticism of financial regulators. For example, China Banking Regulatory Commission was very skeptical about international banks entering the Chinese financial market. Media reactions to his flag project were relatively positive but far from enthusiastic.

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 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. 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 as a cross-border financial hub. So, some experts claimed that the effect of establishing FTZ in the city might have only a local impact on the Shanghainese economy.

The trial run

To check how the new law solutions work in real life, the government often specifies a restricted area in which they come into force. That was the case with Special Economic Zones (the first one was open in Shenzhen, later, this solution was adopted elsewhere) and with the new visa policy. The Shanghai FTZ was also a trial run to determine how it would affect the local economy and whether it would be profitable.

What is different in the Shanghai FTZ?

  • more liberal laws and regulations in terms of shipping and logistics
  • tax incentives
  • imports to SHFTZ are not subject to customs clearance and duty
  • arbitration in the SHFTZ is governed by a separate set of Arbitration Rules issued by the Shanghai International Arbitration Center (SHIAC)
  • less financial requirements for setting up a company in China
  • simplified procedure for foreign investors to establish a company in China (one-stop application)
  • different rules for foreign exchange
  • registering virtual office to enjoy the regulations
  • preferential environment for foreign investment
  • positive list – only specific activities allowed
  • and more.

Shanghai FTZ: Summary

If China is the “world factory,” then Shanghai is its gateway. The port of Shanghai handles around 40 million TEU annually and is the busiest container port in the world. The factories located in Jiangsu and Zhejiang provinces feed it with an unending stream of goods, which are transported to every corner of the globe. The Chinese authorities wanted to take advantage of this and turn Shanghai into the world’s financial center. Now, Shanghai is the third biggest financial center.

Many benefits from the establishment of the Shanghai Free Trade Zone, especially companies engaged in industries banned for foreign investors outside the zone in China.