Shanghai free trade zone

Official data shows 38 foreign firms are among the roughly 1,400 to have registered in the zone, reflecting external investors' doubts over the level of Beijing’s commitment to pushing ahead with reform.

China Banking Regulatory Commission approval was still needed before any account could be set up in the zone, said Liu Ligang, chief China economist at ANZ Banking Group, who added that the key question now was how to control the flow of capital.

" It seems everyone could shift their capital there as the guideline lacks a clear definition on who can open accounts in the zone and who cannot," Liu said. «This is very dangerous. Such loose rules could cause huge hot money inflows into mainland China and make the domestic asset bubble even bigger.»

Detailed plans for the Shanghai Free Trade Zone (FTZ) have fueled hopes for further reforms and liberalization in China but some analysts think it’s too early to celebrate.

" We think the importance of the Shanghai FTZ will surely surpass any other existing special zones," Ting Lu, China economist at Merrill Lynch, said. «However, we believe markets need to curb their enthusiasm if they hope the FTZ will become a strong competitor of Hong Kong… [or will] rapidly unveil a new era of comprehensive reforms for the whole China,» added Lu.

Plans unveiled over the weekend confirmed that restrictions for foreign investment in the tightly-controlled service industry will be eased, while the domestic currency will potentially be opened up to market forces within the new 28.8-square kilometer district.

Furthermore, state officials said the zone will be viewed as a testing ground for reforms that could eventually be rolled out across China, a sign that the world’s largest economy could be moving towards relaxing restrictions on foreign investment.

But according to Lu, although many investors hope the FTZ could rival the success of Hong Kong, where many Chinese companies go to raise global funds and which has thrived as an offshore center for the renminbi, he doubted this would be the case.

Lu considers there will be no special tax treatments in the FTZ, while Hong Kong’s 16 percent personal income tax will continue to retain talent and headquarters of global banks. Secondly, though the central government vowed to build a business environment with rule of law and international standards, the very requirement of 'replicability' might hinder bold legal and administrative reforms, which are crucial for building a center for finance and commerce. Lu also cast doubt over whether the new trade zone would likely form a blueprint for reforms to be rolled out across China.

He said that unfortunately many much needed reforms in China, such as reforms on state-owned enterprises, public finance, land ownership and the Hukou system (a household registration system that links benefits like health care, education and pensions to a person’s place of birth and discourages migration) won’t be in the spotlight in the small 28.8 square km Shanghai FTZ. Shanghai is too unique to test many of China’s necessary reforms, and the FTZ is just too small to have the capacity to test those reforms.

However, other industry commentators were more convinced that the new zone would lead to widespread reform in China.

" The official launch of the Shanghai pilot free trade zone will likely trigger a new wave of reforms and liberalization in the coming years. This is comparable to the Special Economic Zone in the early 1980s and the Pudong Development Zone in the early 90s," said HSBC analysts in a note.

In the early 1980s China opened a series of special economic zones to test economic policies and government measures. Pudong, another Special Economic Zone, is currently home to the Shanghai Stock Exchange as well as some of Shanghai’s most iconic buildings.

The analysts expect concrete measures of services sector deregulation and financial reforms to be unveiled in the coming months. This will have profound implications for China’s long-term growth outlook and financial landscape.

Recently Shanghai has applied to the central government for permission to build a multibillion-yuan container port facility to further develop its free-trade zone.

The city plans to start the fourth phase of the expansion of Yangshan Port, and construction will begin once the National Development and Reform Commission gives the go-ahead.

According to Xu Wei, the chief of logistics with Shanghai Tongsheng Investment, the city’s investment arm in charge of development at the deep-water port, the new phase of expansion will begin «sooner rather than later», in line with the central government’s ambition to build a mini-Hong Kong in the country’s commercial hub.

On the mainland, local governments must receive approval from Beijing before they can begin huge infrastructure projects.

Sources with the knowledge of the proposed expansion said the development of new berths would cost at least 10 billion yuan (HK$ 12.7 billion), to add annual capacity of 4 million 20-foot equivalent units.

Shanghai has been the world’s busiest container port for the past three years, and the Yangshan deep-water port accounted for about 40 per cent of the container volume the city handled last year.

The free-trade zone is expected to help Shanghai boost international transshipment — cargoes handled in the zone will be transferred to other vessels bound for foreign destinations after temporary storage.

Goods stored in the free-trade zone are exempt from customs intervention, as the authorities aim to facilitate commodity flows.

International transshipment is a key factor used to gauge the level of internationalisation of a container port.

Conclusion

The new zone is being seen as the most important attempt at reform since Communist leader Deng Xiaoping, the architect of China’s transformation to a market economy, designated Shenzhen on the border with Hong Kong a special economic zone in 1980.

" The establishment of the Shanghai free-trade zone is a significant move for China to conform to new trends in the global economy and trade," Mr Gao said.

The new zone «shows that the new government is keen on making reforms», said Stefan Sack of the European Chamber of Commerce in China but he added that «a free-trade zone in Shanghai alone will not change how business is done in China» .

The goals are to upgrade financial services, promote trade and improve governance as well as measures to encourage foreign investment in 18 sectors in the country’s tightly regulated service industry. There are also plans to experiment with the convertibility of China’s tightly controlled currency, the yuan, and let market forces rather than regulators set interest rates.

The FTZ will further liberalize multiple sectors including investment, services, trade, and financial services, which will have a profound impact on China’s economy.

The FTZ will challenge China’s current system of administrative permits and approvals, as it introduces the concept in economic management that absence of legal prohibition means freedom.

The FTZ aims to build a new institutional system capable of being integrated with the international system. The system developed in the FTZ will serve as a model for the rest of China.

The FTZ aims to provide world-class transport, communications, management and treasury facilities for domestic and foreign enterprises who consider Shanghai to be a major hub of their supply chains and investment management across Asia. These developments will upgrade Shanghai’s core competitiveness and fortify its position as a global trading, logistics, investment and treasury center.

Literature

China opens Shanghai free-trade zone. The Guardian. Sunday 29 September 2013 //

http://www.theguardian.com/world/2013/sep/29/china-shanghai-free-trade-zone.

Davis, Bob and Silk, Richard. China to Test Looser Grip on Economy. New Free-Trade Zone in Shanghai Opens. The Wall Street Journal //

http://online.wsj.com/news/articles/SB10001424052702304795804579100640245613408.

Free-trade zone renews hopes for foreign board. Friday, 11 October, 2013 //

http://www.scmp.com/business/money/markets-investing/article/1 329 000/free-trade-zone-renews-hopes-foreign-board.

Han Zheng: How Shanghai’s Free Trade Zone Works //

http://english.caixin.com/2013;11−14/100 604 877.html.

Holliday, Katie. Why Shanghai free trade zone is no match for Hong Kong. Monday, 30 Sep 2013 //

http://www.cnbc.com/id/101 071 983.

Jeanny Yu. Proposals announced to boost Shanghai Free Trade Zone. Monday, 02 December, 2013 //

http://www.scmp.com/business/economy/article/1 371 388/proposals-announced-boost-shanghai-free-trade-zone.

Overview of the China (Shanghai) Pilot Free Trade Zone //

http://www.mallesons.com/Documents/Shanghai_FTZ_Overview.pdf.

Patch, James. Shanghai Opens Free Trade Zone; Internet Restrictions Remain. The Diplomat. September 29, 2013 //

http://thediplomat.com/2013/09/shanghai-opens-free-trade-zone-internet-restrictions-remain.

Roberts, Dexter. Shanghai’s New Free-Trade Zone: Reform Breakthrough or Hype? September 20, 2013 //

http://www.businessweek.com/articles/2013;09−20/shanghais-new-ftz-trade-reform-breakthrough-or-hype.

Schuman, Michael. Shanghai Has a Free-Trade Zone, so Now What? //

http://business.time.com/2013/09/30/shanghai-has-a-free-trade-zone-so-now-what/#ixzz2nqME3LD2.

Shanghai Free Trade Zone: The next Shenzhen? //

http://www.economist.com/news/china/21 587 237-new-enterprise-zone-could-spark-wider-market-reformsbut-only-if-bureaucrats-ease-their-grip.

Shanghai Free-Trade Zone Plans Spark Surge in Residential Prices. Emerging Markets News //

http://www.bloomberg.com/news/2013;09−25/shanghai-free-trade-zone-plans-spark-surge-in-residential-prices.html.

Shanghai Free-Trade Zone struggles through birth. Saturday, 09 November, 2013 //

http://www.scmp.com/comment/insight-opinion/article/1 351 259/shanghai-free-trade-zone-struggles-through-birth.

Shanghai FTZ: China’s Globalization 2.

0. Zhang Monan, researcher, China Int’l Economic Exchanges Center. September 27, 2013 //

http://www.chinausfocus.com/finance-economy/shanghai-ftz-chinas-globalization-2−0.

Shanghai research on FTZ details. China.org.cn, October 15, 2013 //

http://www.china.org.cn/business/2013;10/15/content_30 300 107.htm.

Shanghai wants to expand container port. 2 December, 2013 //

http://www.scmp.com/business/economy/article/1 370 442/shanghai-wants-expand-container-port.

Shanghai’s Free Trade Zone //

http://www.cityweekend.com.cn/suzhou/articles/blogs-suzhou/business/shanghais-free-trade-zone1.

Sudworth, John. Shanghai’s free trade zone raises hopes. BBC News, Shanghai. 26 September 2013.

Welcome to Investing in Shanghai Free Trade Zones… //

http://ftz-shanghai.com.

Xie, Frank. Will Shanghai Free Trade Zone Succeed? Epoch Times. October 19, 2013.

Shanghai research on FTZ details. China.org.cn, October 15, 2013 //

http://www.china.org.cn/business/2013;10/15/content_30 300 107.htm.

Shanghai Free-Trade Zone struggles through birth. Saturday, 09 November, 2013 //

http://www.scmp.com/comment/insight-opinion/article/1 351 259/shanghai-free-trade-zone-struggles-through-birth.

Schuman, Michael. Shanghai Has a Free-Trade Zone, so Now What? //

http://business.time.com/2013/09/30/shanghai-has-a-free-trade-zone-so-now-what/#ixzz2nqME3LD2

Schuman, Michael. Shanghai Has a Free-Trade Zone, so Now What? //

http://business.time.com/2013/09/30/shanghai-has-a-free-trade-zone-so-now-what/#ixzz2nqME3LD2

Welcome to Investing in Shanghai Free Trade Zones… //

http://ftz-shanghai.com.

Patch, James. Shanghai Opens Free Trade Zone; Internet Restrictions Remain. The Diplomat. September 29, 2013 //

http://thediplomat.com/2013/09/shanghai-opens-free-trade-zone-internet-restrictions-remain/

Han Zheng: How Shanghai’s Free Trade Zone Works //

http://english.caixin.com/2013;11−14/100 604 877.html.

Shanghai Free-Trade Zone Plans Spark Surge in Residential Prices. Emerging Markets News //

http://www.bloomberg.com/news/2013;09−25/shanghai-free-trade-zone-plans-spark-surge-in-residential-prices.html.

Shanghai’s Free Trade Zone //

http://www.cityweekend.com.cn/suzhou/articles/blogs-suzhou/business/shanghais-free-trade-zone1.

Shanghai Free Trade Zone: The next Shenzhen? //

http://www.economist.com/news/china/21 587 237-new-enterprise-zone-could-spark-wider-market-reformsbut-only-if-bureaucrats-ease-their-grip.

Roberts, Dexter. Shanghai’s New Free-Trade Zone: Reform Breakthrough or Hype? September 20, 2013 //

http://www.businessweek.com/articles/2013;09−20/shanghais-new-ftz-trade-reform-breakthrough-or-hype.

Shanghai Free-Trade Zone Plans Spark Surge in Residential Prices. Emerging Markets News //

http://www.bloomberg.com/news/2013;09−25/shanghai-free-trade-zone-plans-spark-surge-in-residential-prices.html.

China opens Shanghai free-trade zone. The Guardian. Sunday 29 September 2013 //

http://www.theguardian.com/world/2013/sep/29/china-shanghai-free-trade-zone.

Shanghai FTZ: China’s Globalization 2.

0. Zhang Monan, researcher, China Int’l Economic Exchanges Center. September 27, 2013 //

http://www.chinausfocus.com/finance-economy/shanghai-ftz-chinas-globalization-2−0.

Xie, Frank. Will Shanghai Free Trade Zone Succeed? Epoch Times. October 19, 2013.

Davis, Bob and Silk, Richard. China to Test Looser Grip on Economy. New Free-Trade Zone in Shanghai Opens. The Wall Street Journal //

http://online.wsj.com/news/articles/SB10001424052702304795804579100640245613408.

Sudworth, John. Shanghai’s free trade zone raises hopes. BBC News, Shanghai. 26 September 2013.

Free-trade zone renews hopes for foreign board. Friday, 11 October, 2013 //

http://www.scmp.com/business/money/markets-investing/article/1 329 000/free-trade-zone-renews-hopes-foreign-board

Jeanny Yu. Proposals announced to boost Shanghai Free Trade Zone. Monday, 02 December, 2013 //

http://www.scmp.com/business/economy/article/1 371 388/proposals-announced-boost-shanghai-free-trade-zone

Holliday, Katie. Why Shanghai free trade zone is no match for Hong Kong. Monday, 30 Sep 2013 //

http://www.cnbc.com/id/101 071 983.

Overview of the China (Shanghai) Pilot Free Trade Zone //

http://www.mallesons.com/Documents/Shanghai_FTZ_Overview.pdf.

Shanghai wants to expand container port. 2 December, 2013 //

http://www.scmp.com/business/economy/article/1 370 442/shanghai-wants-expand-container-port.