Shanghai Free Trade Zone
In China, business is largely associated with the culture of caution (the government does not like taking risks), which explains the reason the governments undertakes great control of businesses within the country. Opening of the Shanghai Free Trade Zone as such, is significant since it heralds determination of Chinese government to ease the restrictions it imposes on investments. The 28-square kilometer zone which is backed by the Chinese Cabinet and State Council was announced in July. According to Han Zheng, Shanghai Party Leader, the government approved the 28-square kilometer to cover the 4 bonded areas that were approved by government as well as the management commission. All these, he said had strong foundation and hosted logistic areas and necessary ports. The government therefore, chose to cover these areas (BArboza 1-4).
Why the free trade zone? Generally, free trade zones are created with the purpose to reduce barriers to trade like allowing trade liberalization in order to keep the market forces prevalent (Yang 274). In the case of China, the Shanghai FTZ is more of a lab where the government can experiment with business- a concept that is owed to its strict business control, the administration so far has not allowed. Li makes the observation that “Premier Li Keqiang… has called it a laboratory for the remaking of the country’s financial sector” (1). Zheng noted the zone was a step towards transforming the government’s role in business by permitting the market forces to prevail. According to Barboza, “An important motivation of the Free Trade Zone may be to prepare for China’s eventual participation in international initiatives such as the 12-country Trans-Pacific Partnership”(1-2).
This zone is going to permit banks and businesses to experiment in areas that previously were tightly under the control of the government like internationalization (Full convertibility) of the Chinese currency and the opening of a financial system (including loosening the regulation of interest rates).
Who will participate in the zone? The FTZ aims at attracting participants from different industries. The industry most encouraged will be financial industry. In fact, the premier intends for the zone to primarily focus on financial sector (Li 1). Banks are going to be permitted to experiment with various financial management areas that they were not allowed to take part in before (like exchange rate flexibility, liberalization of interest rates and the capital accountability among others. Private companies as well will be presented with the opportunity to invest in varying industries such as travel and tourism industry, shipping ventures as well as medical and health insurer sectors (Barboza 1-2; Shuli 10-12).
Both the alien and domestic enterprises will also receive permission to make investment in the zone. To encourage foreign investment, for example, the government makes the promise to lift restrictions “on foreign investment in some telecommunications services and on the production and sale of video game consoles” (Barboza 4-5).
According to Rabinovitch, 1,400 companies have registered already to carry out business in the Shanghai FTZ (1). On the day the zone was opened, only two banks were foreign. However, since then, the number has risen to twelve banks. The entrants that are most recent include HSBC and Deusche Bank.
How it works. Hu Shuli, a Caixan staff reporter, held an interview with the Shanghai party leader Han Zheng. Among things that were discussed in the course of the interview, Zheng described the manner in which the Free Zone would work.
In a manner that is so unlike the China we have always known, Zheng said creation of the FTZ was not based on pre-conditions (policies). Instead, the zone was based on “an innovative system and personally motivated innovation” (qtd. in Shuli 11). In this regard, the zone would be market oriented. Market forces therefore, would determine the manner in which resources would be allocated.
As alluded above, Zheng noted the zone was a step towards transformation of the government’s administrative system. On the same note, Zheng, asserted the approval and review system that has been in existence before has been quite unreasonable in a couple of ways. For instance, they are in conflict with the international norms and market, a problem that has inspired the ambitions of China to raise itself to international level of competitiveness.
Still, Zheng has emphasized on the need to adapt the zone to Chinese context instead than copying what has been done in other countries: “Our task is to introduce innovations that can be applied in other areas around the country” (qtd. in Shuli 12).
What is more, Zheng has also described steps the government is supposed to take in order to adapt to the context of the zone. In order to facilitate investment and the trade, the government first and foremost needs to make reform investment, which involves getting rid of the existing unsuitable approval and review system. The new system therefore should be more convenient and open. The target is having a new system before the foreign investment can begin flowing. The “negative list process” is a strategy that tells companies what they cannot do and eaves the rest (what they can do) for individual investors to make decisions. Consequently, it is different from previous systems because the companies at least are aware of what they should not do. Consequently, businesses would not have to make reports to government. The “negative list” will be revised and reviewed each year.
When questioned on whether such revisions meant trimming the number of not-to-dos, Zheng replies “That could be done gradually in 2014, 2015, or 2016 as we follow the path” (qtd. in Shuli 17). The use of ‘could’ indicates no assurances are made on whether the number of items will be annually reduced or at all for that matter.
Still, businesses that are in FTZ are free from any reviews by the government. Initially, businesses were forced to register with the government’s bureau of commerce and industry. What is more, such reviews were divided into varying categories. With the new system however, only one category is available. The government, equally has adopted the FTZ policy of “register first, approve later” (Zheng, qtd. in Shuli 16). In other terms, a business can begin operations as soon as it gets registered. Whether it is applicable for government licensing and/or approves depending on whether they operate in areas of business demanding such procedures. The period taken to get a license has been shortened as well, taking 4 days (down from a minimum of twenty nine days outside the zone).
The government will as well promote competition within the zone according to Zheng. When questioned about the manner in which the government will treat investments that are made by monopolistic state-owned company vis-à-vis the rest, Zheng talks about ‘national treatment’. In Zheng’s interpretation, this simply means that all the businesses (both foreign and domestic) will get similar treatment at admission. In other terms, the system will be fully transparent. “The government will not have treatments because all companies are completely equal. The process is transparent and follows all laws. There is no room for murky transactions” (qtd. in Shuli 18).
How long it will last. The government has not made any specifications regarding the duration Shanghai’s FTZ will last. Probably, the government is not interested in putting a timeline to the zone experiment, as it will wait till it makes sensible inference from it. Besides, the FTZ is part of the government’s long term transformation goal.
FTXs comprises experiments. The Shanghai’s FTZ as already emphasized here is China’s lab in which case the administration wants to see first-hand benefits of contemporary administration innovations.
So far, there are certain aspects of free zone that testify the usual habits of Chinese government. For instance, initially, the government was quite vague regarding the zone. According to Robinavicth A lack of clarity about promised measures for lightening China’s financial regulations also deterred banks from entering the zone at its inception” (3). What is more, the “negative list’ is said to restrict entry of several industries. So far, the negative list still has 190 industries which foreign businesses cannot invest in.
Nevertheless, no cause for alarm exists yet. The zone is an experiment that is still in initial stages. It should allay fears that are part of the cautious nature adopted by the Chinese government. As time goes by, perhaps the zone will unlock more of the reserves the government has.
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Barboza, David. Experimental Free-Trade Zone Opens in Shanghai, The New York Times,
Sept. 29, 2013. Web, 11 December 2013
Li, Yue. Shanghai Free-Trade Zone Gains ‘Precious’ Occupant, The Wall Street Journal,
Nov. 18, 2013. Web, 11 December 2013
Rabinovitch, Simon. Shanghai Free Trade Zone Attracts 1,400 Companies, Investors
Chronicle, Nov. 28, 2013. Web, 11 December 2013
Shuli, Hu. Han Zheng: How Shanghai’s Free Trade Zone Works, Caixin Online, Nov. 14,
- Web, 11 December 2013
Yang, Yi-Chih. A Comparative Analysis of Free Trade Zone Policies in Taiwan and Korea
based on a Port Hinterland Perspective, The Asian Journal of Shipping and Logistics, 25.2 (2009), 273-303