Shanghai’s foreign trade zone established
September 30, 2013 Category Foreign trade, Weekly
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.
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