The China (Shanghai) Pilot Free Trade Zone (FTZ) was inaugurated on September 29. Commerce Minister Gao Hucheng said at the opening ceremony that the government hoped the zone would function as a testing ground for reforms and an open economy and act as a demonstration to promote economic development nationwide. A video-game joint venture of Microsoft and Shanghai-based internet TV firm BesTV became the first company registered in the free trade zone. The company’s business license was handed over by Shanghai Party Secretary Han Zheng to Ralph Haupter, Chairman and Chief Executive of Microsoft China.
Another 35 companies were given licenses to operate in the zone, which covers almost 29 square kilometers in the Pudong New Area. A blueprint for the free trade zone charts over 90 policies concerning five major areas. DBS China Managing Director Tan Teck Long described the launch as a significant milestone for the country’s economic reforms, saying it would bring vigorous developments in trade, law, consulting and especially financial innovation. The China Banking Regulatory Commission (CBRC) said it will scrap the limitation on the number of new branches a bank can establish in the zone per year, ease requirements on the operating years required for foreign banks to carry out yuan business and encourage banks in the zone to carry out cross-border financing services. The China Securities Regulatory Commission (CSRC) announced it would allow the establishment of an international oil futures trading platform to facilitate foreign participation in domestic commodities future trading. Foreign and Chinese investors in the zone, including institutions and qualified individuals, will be allowed to invest in securities markets directly across the border. A negative list of 190 items will be released soon to allow more leeway for foreign investors and traders, according to Dai Haibo, Deputy Director of the zone’s Administrative Committee. The negative list, in contrast to a positive list, specifies all sectors in which restrictions will remain for foreign enterprises. A registration system for setting up an operation in the zone has been introduced to replace the current approval system, which has simplified procedures and reduced processing time from 29 days to four days, Dai said.

Premier Li Keqiang, Vice Premier Wang Yang and People’s Bank of China (PBOC) Governor Zhao Xiaochuan, who had been expected to be present at the opening of the zone, were absent.

According to the reform blueprint for the Shanghai FTZ, 18 service sectors will open wider to foreign and private capital ranging from finance, shipping, commerce to culture. Foreign companies will be permitted to conduct “a portion of specific types of telecommunications value-added business on condition of ensuring information security.” Foreign companies can establish call centers, provide internet information and related software technology services in the zone. They are also allowed to produce and sell video game gadgets in China, providing the contents pass the country’s censorship. In addition, foreign travel agencies registered in the FTZ can conduct overseas trip business except to Taiwan. Entertainment agencies will be allowed, for the first time, to solely provide performance brokerage business in Shanghai. Foreign companies could also team up with Chinese partners to open educational and vocational training centers, provide health care insurance services, and establish independent medical institutions. Laws and regulations governing foreign investment will be suspended for three years, starting on October 1, to remove legal barriers for foreign participants. Major Chinese banks have applied to open a branch in the pilot zone. Shanghai Pudong Development Bank (SPDB) is set to become one of the first batch of lenders to operate a branch in the zone. Beijing will allow foreign banks to skip long and often bureaucratic approval processes when setting up their wholly-owned units in the free-trade zone. It often took a few years for a foreign bank to first set up a symbolic representative office in China and then upgrade it to a full-service branch. Peter Wong, Chief Executive of HSBC Asia Pacific said in a statement that the free trade zone in Shanghai “will open a new phase in China’s financial reform process, bringing greater flexibility and fresh options to the heart of the world’s most dynamic economy.”

The FTZ will be a testing ground for further liberalization of China’s capital account and financial services. Changes are to include interest rate reform and exchange rate convertibility. Given the fungible nature of money, the greatest challenge will be controlling the flow of capital between the FTZ and the rest of China. If capital account liberalization takes place, the different interest rates and exchange rates will create trading distortions and arbitrage opportunities for traders on both sides of the FTZ. It is not clear how this will be managed, or which government body will assume authority. “There must be a new supervisory framework regulating banks operating in the free trade zone,” ANZ Bank Analysts wrote in a recent report. Without such controls and further reforms of the mainland banking system, says ANZ, there is a danger that leakage from the FTZ could upset the country’s financial stability, the South China Morning Post and Shanghai Daily report.

The United States called on China to reopen its market to U.S. chicken broiler parts following the formal adoption by the World Trade Organization (WTO) of a ruling in the four-year-old dispute. U.S. chicken exports to China have fallen 90% over the past four years, costing sellers an estimated USD1 billion, after China imposed high anti-dumping duties. U.S. Trade Representative Michael Froman said that in the wake of the ruling, China should revise its trade rules. China welcomed part of the ruling. The WTO panel report supported China’s reasons regarding how domestic industry and trade level differences are determined. China imposed anti-dumping duties on chicken products from the U.S. in September 2010, claiming they were subsidized and then dumped in the Chinese market at a price less than fair value.

Chinese authorities seized hundreds of Belgian pigeons, including Bolt, the world’s most expensive racer, sold for €310,000 earlier this year. Bolt was released last week, together with 400 other birds, but a further 1,200 racing pigeons are still held because of a dispute over import duties. The Belgian Ambassador to China, Michel Malherbe, is in talks to try to free the remaining pigeons. Chinese authorities have said the birds were declared at only nominal values, meaning China would be losing out massively on tax and import duties. Import duties are 10% of the value and, on top of that, a tax of 13% is levied, meaning China was due around €75,000 for Bolt alone. He was auctioned in May by Pigeon Paradise (PIPA), and his release was secured after PIPA’s Chief Executive Nikolaas Gyselbrecht flew to Beijing to negotiate, the South China Morning Post reports.

China’s manufacturing activity in September expanded the most in six months, indicating continuing improvement in the country’s economy. The HSBC Flash China Manufacturing Purchasing Managers Index (PMI) settled at 51.2 this month, up from August’s final reading of 50.1 and July’s 47.7, which was the lowest in 11 months. A reading above 50 means expansion. The final HSBC PMI – released on September 30 – stood at 50.2, below last week’s flash reading of 51.2, with domestic orders proving to be weaker than preliminary estimates suggested. The Flash PMI showed growth in output, new orders, export orders and prices was faster in September, while employment fell at a slower rate. Qu Hongbin, Chief Economist for China and co-head of Asian Economic Research at HSBC, said the data confirmed a rebound in China’s growth supported by improvements in external and domestic demand. Zhu Haibin, JPMorgan China’s Chief Economist, said the PMI was higher than expected, but China may still risk slower growth next year under economic reforms and relatively tight monetary policies. “The economy is still facing structural problems of overcapacity in some key industries and mounting financial risks,” Zhu said. Exports staged a promising comeback this month, the Flash PMI showed, with new export orders jumping 3.6 points to a 10-month peak of 50.8. It was the first time in six months that export orders were above 50 points, the level that indicates expansion. Domestic demand also showed resilience. The National Bureau of Statistics (NBS) releases the official manufacturing PMI, sampling mainly state-owned companies, on October 1. The official gauge rose to 51 in August, the highest since April 2012.

China’s hidden household income totaled CNY6.2 trillion in 2011 – accounting for 12% of the country’s GDP – underlining the widespread impression corruption represents a “serious challenge” to society, according to a study by the National Economic Research Institute in Beijing. Most of this undeclared personal or household income comes from undocumented sources and is held by a few individuals, the study says. The analysis is based on a survey of more than 5,300 households in 18 provinces and 66 cities. The study results estimated the 2012 per capita income of the richest 10% of the urban population at CNY188,000 – 3.2 times more than the official figure. The urban rich make almost 21 times more than the poorest members of society. Official figures placed the gap at 8.6 times. “Corruption’s impact on society is expanding, posing a serious challenge to society,” the report said. Hidden income, also known as ‘grey income’, includes earnings ranging from utterly illegal activities such as bribes and off-book transactions, to gifts by parents to teachers. The study concludes the urban population had a Gini index of 0.5 in 2011, a higher figure than that released by the official National Bureau of Statistics (NBS) in January. The study cited loose monetary policy, exacerbated by lax regulations, as the cause of the swelling volume of hidden income. It pointed to the mismanagement of public funds, a lack of procedures regulating the economy, uneven income distribution triggered by monopoly holdings, government-determined monopolies in public administration, a lack of effective oversight of public power, and corruption in the public service sector. The first investigation into the subject in 2007 found a 55 times difference in income between China’s poorest and wealthiest groups in 2005, significantly greater than the official figure of 21 times, the South China Morning Post reports.