Countdown for Shanghai Free Trade Zone
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The establishment of Shen- zhen Special Economic Zone in 1979 marked the start of China’s reform and opening up. Nowadays， the economic reform of China has been in an important period with a lot of obstacles standing in the way. This March， Chinese Premier Li Keqiang visited shanghai and set the tone for the pilot free trade zone in Shanghai.
On August 22， the Ministry of Commerce of China announced the pilot free trade zone in Shanghai had been approved by the State Council. The pilot area is going to cover the Waigaoqiao Bonded Area， Waigaoqiao Bonded Logistics Area， Yangshan Bonded Port and Comprehensive Bonded Area at Pudong Airport. The total area is 28.78 square kilometers.
It is said that the Shanghai Free Trade Zone is to be officially founded on either September 27 or 28， depending on the schedule of Li Keiqiang since the Premier is to attend the opening ceremony himself.
The free trade zone is coming out soon but not uneventfully. Even with the Premier laying eyes on it， the Shanghai Free Trade Zone has met a lot of hindrance before the establishment. Ev- eryone， including the Premier， wants to see what benefits this can bring to enterprises， people， and ultimately China’s economy.
Chen Bo， who is the Deputy Director of the World Economy and Trade Department at Shanghai University of Finance and Economics and the Deputy Director of the Research Center for Shanghai Free Trade Zone， makes an introduction to the “things” behind the Shanghai Free Trade Zone. In his opinion， the official name of the free trade zone China （Shanghai） Free Trade Zone could show the important task it takes to explore the new path of opening up and the new pattern of China’s economy.
Chen， a researcher engaged in the general plan of Shanghai Free Trade Zone， says that the zone involves the free access to the goods， personnel and capital， which are given great discounts and convenience in policy and tax. The financial reform， such as the free convertibility of RMB capital account， is going to see awkward progress there.
The Pilot Zone Born out of Worries？
Why does the Chinese government build the Shanghai Free Trade Zone in such a high profile？ Simply put， it is actually a result of the Chinese economic development grilled by the international and domestic problems at present.
The domestic problem is the slowed growth of China’s economy which needs the stimulus of new economic growth point. Chen Bo says that the opening of cities in 1984， the speech Deng Xiaoping made in his Southern Tour in 1992 and the joining into WTO were all measures to boost the reform with opening up and to boost the economic growth with developing foreign trade. The new round of reform， starting with the free trade zone， is the continuation of China’s way of reform.
Compared with the domestic problem， the international issue has a larger and more direct influence over the establishment of the free trade zone. In 2008， the U.S. announced the start of the “Trans-Pacific Strategic Economic Partnership” （TPP） and initiated the negotiation in 2009. It tried to build a unified big market encircling the Pacific through TPP in 2020. This agreement not only required the members to exempt duties for each other， but also asked them to open all economic fields including agriculture and economic services for the freer flow of capital and personnel.
“Obviously， TPP is designed based on the U.S. own interest and countries in the Asian-Pacific regions showed little interest at first. They put forward the Regional Comprehensive Economic Partnership in 2009 to counter the TPP，” Chen Bo says. However， the negotiation was not started because of the disputes in Nansha Islands and Diaoyu Island. It is said that the first preparatory meeting is to be held in October but by then six rounds of negotiations of TPP have been finished. 12 countries have joined in， including Japan and Vietnam. Recently， S. Korea is considering joining in TPP as well.
“Li Keqiang said in March that China would definitely join in the negotiation of TPP and might be forced to be a part of it，” says Chen Bo. “Because it will cost more if excluded from a big market. In the China-U.S. Strategic Economic Dialogue this July， China for the first time showed its interest in joining in TPP.”
As required by TPP， China needs to be full open in 2020. It leaves China only five years for experimentation.“Therefore， the establishment of free trade zone in Shanghai is not only necessary， but also urgent. It needs to be done quickly.”
“The establishment of Shanghai Free Trade Zone is to test what challenges might be brought to Chinese state-owned enterprises and regulatory system in the controllable global competition， which could provide references for the in-depth reform，” Chen Bo says. It is the “formation of repeatable and extendible experiences” that is the minimum requirement of State Council for the free trade zone. In his opinion， the core of this experiment to see the abil- ity of monopolized industries （mainly referring to financial industries） to deal with changes and the shift of governmental roles.
Lowered Fundraising Cost
It is said that the Chinese government is going to allow the free convertibility of RMB capital account in the Shanghai Free Trade Zone.
“RMB needs free convertibility， but there are restrictions since the opening up is not to be finished in one go，” says Chen Bo. “This is important. Many enterprises are facing broken capital chains. It is more than deficit in their financial reports； instead， it is a result of the untimely refunding because of the increasing cost of fundraising.”
In the past， China only kept the manufacturing and processing opening， but it is the financial services that are opened in the Shanghai Free Trade Zone. The free convertibility of RMB is an important part of them. “Most of the enterprises inside the zone are involved in import and export and export-oriented processing which has the demand for RMB convertibility. Nevertheless， there might be some limitations in the detailed rules， such as the quota. Once the free convertibility of RMB is available， foreign banks will have sufficient RMB for more businesses. It almost costs them nothing in raising US-dollar-based funds and could make a killing even if they provide the loans for Chinese clients with the 3% interest rate. Without the watchful eyes of the central bank and the banking regulatory commission， the market-oriented interest rate is necessarily to be low， which brings down the cost of enterprises in that region.”
“Of course， since the fundraising cost in the free trade zone is much lower than that outside the zone， it is likely to trigger the capital flight and other arbitrage activities，” Chen Bo says. Therefore， it is necessary to list some regulations over foreign exchange in the detailed rules. “The purpose of the experiment is to bring about the true competitiveness， which is an efficient sample for the general situation. If there are loopholes for arbitrage， there will be new breeding bed for the corruption， which definitely dooms this reform to a failure.”
The Simplified Trade
The administrative laws and regulations in the Shanghai Free Trade Zone are also the key points of reform.
The new information from the State Council says that an internationally common pattern featuring “negative list” is going to be tested in the Shanghai Free Trade Zone. The said“negative list” is actually a list clarifying these industries that foreign investment is forbidden.
Chen Bo says that the laws will be clear if the negative list is used. After detailing which could not be done， foreign investors will know that the rest are available and need no further explanation. A great progress for China， where now the “positive list” is used to tell foreign investors which business they can invest in. But for those not in the“positive list”， the administrative departments are usually required to make a decision whether an access is given or not. This could form a gray area， a hotbed for the corruption.”
Before the “negative list”， the Chinese government usually had strict examinations over the investors’ qualifications before giving the license. In Chen Bo’s opinion， the government needs to change its own function in the new circumstance of opening up. The preregistration examination is going to be simplified and needs to be replaced by the system of filing. For the enterprises inside the zone， it is going to be more convenient for their importing and exporting， which could save them time and money.
Chen Bo says that “the system of filing only needs one seal”. “Simply put， a foreign company only needs to report itself to the administrative department in China for its settlement in this country. The previous examination and approval system requires the investor to collect several seals from several de- partments， including the commerce administration， customs and taxation， and this will take six months without any glitches. Now with only one seal needed， it is expected that a foreign enterprise could get the license of establishing its presence in China within 80 days. Such a system could not only save time， but also give out a track for problems.”
The Unprecedented Reform to Foreign Investment
If the dividends brought by the free trade zone to the logistics and trade industries are just marginal adjustments based on the original bonded area， the policies of being more open to the foreign investment can be said to be an unprecedented change in the history of China.
Quite a little information was disclosed from the official outlet， but it has been made clear that the Chinese government is going to ease the regulation over foreign investment. Blessed by the “negative list”， the foreign investment procedures might be rewritten. Previously， there are many restrictions to the entry of foreign banks， such as the establishment of branches， business scope， registered capital and so on. All these limitations will be eased or even eradicated in the future.
On August 30， the fourth session of the National People’s Congress of China made a decision to appoint the State Council to make temporary changes to the specified administrative examination and approval in the Shanghai Free Trade Zone. In the pilot zone， foreign companies excluded from the negative list will not be subject to the Law of Foreign Enterprises， Law of SinoForeign Joint-Invested Ventures， and Law of Sino-Foreign Cooperative Ventures TEM-PORARILY. “The broader scope for foreign investment might allow qualified foreign financial institutions to set up banks or to work with qualified private capital in China to found joint-venture banks in the free trade zone. The foreign-invested payment organizations can apply for the license of business in the free trade zone in light of the Management Methods of Payment by Non-Financial Institutions. The green light is also turned on for the foreign investment credit checking companies， which are allowed to set up branches in the zone. Financial leasing companies are allowed to set up branches in the free trade zone without being subject to any requirements about minimum registered capital…” Chen Bo guesses over the possibilities of the Shanghai Free Trade Zone in the financial sector.
Apart from the reform to the access policy， the outsiders are also enthusiastically expecting a lower tariff rate， which is undoubtedly a good catalyst for the foreign investment， in the Shanghai Free Trade Zone. Presently， enterprises inside Qianhai Harbor Cooperative Area for Services in Shenzhen can enjoy the 15% tax rate for their income while the nonadjusted basic tax rate is 25%. However， Chen Bo thinks that the reduction or exemption of tax is only available for some enterprises having certain qualities.“So far as we know， two kinds of enterprises can enjoy the lower tax rate： companies involved in services and Chinese enterprises having investment overseas.”he says， “the imports and exports enterprises， and the processing enterprises， are not in the favor.”
Possibly No Duty-free Stores
Unconfirmed source says that the duty-free stores are going to be included in the general plan of the Shanghai Free Trade Zone as an important part. It is said that the Shanghai government is working with relative national departments to select the best sites.
But as Chen Bo points out， it is hard at least temporarily to see the establishment of duty-free stores in the free trade zone. “On one hand， it is hard for the regulation of the customs. On the other hand， Hong Kong is pressing the central government on this matter if duty-free stores are easily available in Shanghai， Hong Kong will lose half of its 14 million international tourists every year.”
Even though little light is shed on the duty-free stores， Chen Bo says that“Waigaoqiao Bonded Area serves as the main inlet for many imported commodities in China. Therefore the commodities sold there have advantages in price. For example， the wine imported into China through Waigaoqiao Bonded Area accounts for 92% of the total imports volume of wine in China. The price of the wine sold in stores in the bonded area is even lower than that of the local shops in the place of origin of the wine， because the wine sold in local shops are gained from the producers through several dealers， each of whom increases the price a bit higher for his/her own benefits. In comparison， the shops in Waigaoqiao Bonded Area have no dealers to push up the price. I can say that a bottle of French wine can be sold in a shop of Waigaoqiao Bonded Area at RMB 50 yuan， while it costs 8-10 euros in a French store and RMB 200-300 in an ordinary shop in China only if retail shops are allowed to be set up in the bonded area to sell the imported goods.”
Success Entailed， Failure Intolerable
According to Chen Bo， most of the detailed rules about the Shanghai Free Trade Zone have been formulated and sent to authorities at different levels. They are not published because disputes could be still heard concerning the opening of the regulation of financial services.
The biggest resistance of the Shanghai Free Trade Zone just comes from the watchdogs of the financial sections， including the Chinese Banking Regulatory Commission and the Chinese Securities Regulatory Commission. In China， the bigger proportion of state-owned force has in an industry， the more protection this industry receives from the authority. The financial industry is where the stateowned assets have the largest proportion and thus it is most protected by the Chinese government at least the diehard in the government.
“It is hard to see the bad results“caused by the overprotective government in the financial industry. The interest groups are deeply rooted in this sector and cannot see their empire break down. But the monopoly must be broken as soon as possible. From a certain perspective， the success or failure of Shanghai Free Trade Zone somewhat determines the result of the new economic reform in China. I cannot imagine what it is like if the reform failed.”
“There are many voices now. One of them， for example， says that the free trade zone is to be expanded to cover the entire Pudong area of Shanghai. If it could be like that， it is the best result the experiment can get. Pudong represents the majority of the financial industry in China. There are A-share markets， many big banks and financial institutions，” says Chen Bo.
But he admits that it is not possible to make the reform reach that far in one go. It needs to be done phase by phase. If the free trade zone in Shanghai proves to be successful， it might be spread to Tianjin and Guangdong， the center of two economic zones in China.