Shanghai FTZ game-changing reform for China

BeijingMORE than 30 years after China's then-Premier Deng Xiaoping thrust China onto the international stage by creating special economic zones, the city of Shanghai is to officially announce tomorrow the establishment of its free trade zone (FTZ).儲存Many hail what is happening in Shanghai as the most important reform since Deng's 1979 setting up of Shenzhen, Shantou, Xiamen and Zhuhai as areas where market-driven capitalist policies were implemented to woo foreign investors.Prime Minister Li Keqiang, who has made "reform" his leitmotif since he took the country's reins in March, will be in Shanghai for the opening ceremony, and there is excitement on the ground. However, despite the country being just a day away from the event, precious little information has come out about the measures to be in force in the FTZ.The Chinese media has reported that 32 policies have been laid out, but that details of the financial part of the reform - the bit most anticipated - will be released only later.A State Council document outlining the plan published yesterday confirmed that liberalization of trade, interest-rate deregulation, a convertible exchange rate and an elimination of investment restrictions for foreign companies are all on the agenda, but provided little insight into the timeframe within which they will kick in.What is known is that the FTZ will encompass Pudong airport, the Yangshan shipping port and the Waigaoqiao bonded logistics zone - a total of 28 sq km within which lower tariffs will be imposed on goods moving through.The plan indicates that the zone will support the setting up of foreign and joint-venture banks and welcome privately-funded financial institutions. The most significant measure is a three-year suspension of most current legal restrictions on foreign investment. Restrictions on foreign ownership will be abolished; entry barriers will be lowered for the service industry, including finance, shipping, trade services, business services, entertainment and social services.Behind the scenes, there is a lot of talk about the importance of the zone, which many see as a micro-picture of what China could look like in the future.Fan Jiannian, a partner with international law firm Gide Loyrette Nouel, which has been advising its clients on the possible outcome of the reform, said: "The idea is not to just create an isolated zone, but a pilot that could be extended to other cities down the road. Guangdong, Tianjin or Chongqing are already interested."If it is a success, it will be gradually rolled out to these other zones in the near future."Royal Bank of Scotland analysts Louis Kuijs and Tiffany Qiu said in a recent note that the central government has committed to suspending current regulations on foreign direct investments (FDI) within the zone, and drawn up a "prohibited" list of activities and sectors barred from the zone. "This will mean more transparency, less red tape and probably more freedom for business," they said.One aim of the FTZ is to cement Shanghai's迷你倉position as the spearhead of the country's financial reform and to position it as a regional attractive option for trade and financial transactions.China also wants to appear competitive internationally, especially at a time when the United States is in talks for a Trans-Pacific Partnership, from which China has so far been excluded. Analysts say China could be using the zone as a stepping stone towards an investment treaty with the US on the issue.Most importantly, the reform is happening when China is facing structurally slower growth. Its leaders have to keep the economy on an even keel while dealing with worrying debt levels, slower population growth and higher wages. Analysts say only through deep economic reform can China hope to achieve its stated goal of moving on to a more sustainable growth model, which will mean liberalising and opening up financial markets and dismantling state monopolies.Apart from micro adjustments, economic reform was untouched territory by the previous Hu Jintao-Wen Jiabao tandem.Mr Li, on the other hand, has made it his buzz phrase. At an economic forum this month, he said: "An important part of economic-system reform is financial reform." Referring to the FTZ in Shanghai, he said that its being a complicated systemic project indicated that China's reform had entered a "deep-water zone", or its most difficult phase.Though the project and possible impact are still unclear, analysts are, on the whole, positive about it, saying it sets sound foundations for future reform. Yao Wei, an economist with Societe Generale, said: "Initiating the FTZ experiment in Shanghai is a clear sign that policymakers intend to push for economic liberalisation nation-wide quicker and sooner. This is a development that can potentially bring positive surprises in the near future."At this stage though, several questions remain, including those on the relationship between the FTZ and the rest of China: How will cross-border capital flows into the FTZ be controlled? And how will a firewall between capital operations in the FTZ and those outside it be set up?These uncertainties have not curbed the enthusiasm on the ground. Real estate prices near the FTZ have soared, the relevant stocks are up more than 300 per cent and potential international clients have already inquired into the benefits of setting up in the zone. HSBC and other banks have reportedly expressed interest.A Shanghai official said the local government has approached online payment provider PayPal, part of Internet giant eBay, about a tie-up as it seeks to make the FTZ a centre for international e-commerce transactions; Bloomberg news reported this week that Microsoft is forming a video-game venture with a Chinese company, ahead of the zone lifting a 13-year ban on foreign companies selling consoles in China.Franck Desevedavy, a partner with French law firm Asialliance, said: "Shanghai will have no problems attracting companies to the zone. Being in the pilot programme will give them a competitive edge."儲存倉