China to Develop Pilot Free Trade Zone in Shanghai
On September 29, 2013, People’s Republic of China launched the highly anticipated pilot Free Trade Zone in Shanghai’s Pudong New Area. The free trade zone, formally called the China (Shanghai) Pilot Free Trade Zone (SPFTZ), was originally approved in July 2013 by China’s State Council. The launch of this 28 square-kilometer zone—or about 11 square miles—covering ports and logistics areas, has been praised as “a landmark moment” [i] by China’s leaders as it is the first of its kind in mainland China. The SPFTZ has been viewed by many as a significant new step for China’s economic reform and the internationalization of the Chinese currency, the yuan.
The potential for the SPFTZ can be projected by reviewing the success of the Shenzhen special economic zone (SEZ) which the Chinese government established less than 35 years ago. The Shenzhen SEZ, bordering Hong Kong, transformed a fishing village into a manufacturing and trading center as a result of a foreign investment friendly environment. The success of the Shenzhen SEZ model eventually led to the expansion of the zone and the establishment of other special economic zones around China. In view of the development and influence of the SEZ, it should not be a surprise to see more zones modeled after the SPFTZ implemented in other regions in China in the future, should the SPFTZ prove to be a success.
While it is natural to compare the SPFTZ with the Shenzhen SEZ, it is important to note that the Shenzhen SEZ focuses principally on manufacturing while the SPFTZ is the first Free Trade Zone in China to specialize in the liberalization of other industries, with the focus on the service industries. The State Council of China announced six areas (financial, shipping, commercial, professional, cultural and social) where industries will be liberalized to allow freer foreign investment during the next three-year period.[ii] Some of the specific measures about the zone include the unfettered exchange of the yuan, the establishment of foreign and joint venture companies, the relaxation of import quarantine and import/export inspection policies, the establishment of privately funded financial institutions, a tax-free environment for domestic and foreign enterprises, and the sale of video game consoles.[iii] Foreign investors in the six liberalized sectors will be able to establish offices in the zone without going through a burdensome government approval process. By reducing financial and logistics costs for foreign retailers, it is anticipated that the new reforms will stimulate growth of cross-border business transactions and provide Chinese consumers with better pricing and more access to products that otherwise have been unavailable in China.
Many view the liberation of the financial sectors as the more significant feature to be available in the SPFTZ. Financial institutions established in the Free Trade Zone are expected to have more freedom in determining their own interest rates and trading in foreign exchange. A number of financial institutions including China’s largest banks, as well as two foreign banks—Citicorp and Development Bank of Singapore—have received approval to open branches in the zone.[iv] Regulators also plan to promote a futures trading market by allowing securities and futures companies in the zone to engage in over-the-counter trading in commodities and financial derivatives in the domestic market.[v]
As promising as the establishment of the SPFTZ sounds, it is far from being a total free-market environment. One day after the official opening of the SPFTZ, the Chinese government announced a negative list imposing nearly 200 restrictions on foreign investment.[vi] However, instead of requiring companies to obtain specific authorization from the government, the negative list is unique in the sense that anything not specifically prohibited would be allowed. Economists in China have noted that the list was drafted in a way that will allow the regulators much flexibility in applying the restrictions, which exacerbates the uncertainty that the SPFTZ presents. In response, the Chinese government clarified that it will revise the negative list on a yearly basis and will consider relaxing the current list of restriction for the calendar year 2014.
While the world awaits the details about specific changes of the SPFTZ to be revealed by the Chinese government, the SPFTZ remains one of the most promising vehicles for China to lead its financial sectors toward greater integration into the globalized economy and presents an unprecedented opportunity for foreign investors who are interested in entering the Chinese market.
As an experienced counsel to many U.S. companies doing business in China, White and Williams has been a strategic alliance with the Xue Law Firm in Shanghai, China since April 2007. This alliance allows us to better serve U.S. companies who are interested in investing in China and, in particular, participating in the SPFTZ. Tony Lu spends significant time working out of the Xue Law Firm’s Shanghai office to better assist our U.S. clients conducting business in China.
For additional information regarding our China Business Practice Group, please contact Gary Biehn (215.864.7007 | firstname.lastname@example.org), Chunsheng (Tony) Lu (215.864.7006 | email@example.com), or Yanling (Winnie) Wang (215.864.7063 | firstname.lastname@example.org).
[i] See Shanghai Free Trade Zone, The Next ShenZhen?, The Economist Shanghai, October 5, 2013, http://www.economist.com/news/china/21587237-new-enterprise-zone-could-spark-wider-market-reformsbut-only-if-bureaucrats-ease-their-grip.
[ii] See id.
[iii] See David Hong, Shanghai’s Free Trade Zone: What It Means to Retailers, Yahoo Finance, October 18, 2013, http://finance.yahoo.com/news/shanghais-free-trade-zone-means-204200340.html
[iv]See Richard Silk, Shanghai ‘Free-Trade Zone Opens, Wall Street Journal, September 29, 2013, http://online.wsj.com/article/SB10001424052702303918804579104970567894460.html
[v] See id.
[vi] See Richard Silk and Bob Davis, China Releases Restrictions on Investment in Shanghai Free-Trade Zone, Updated by September 30, 2013, http://online.wsj.com/article/SB10001424052702303918804579106403140993022.html