The Shanghai Free Trade Zone
Tom Rafferty (Editor/Economist, Asia)
tomrafferty@eiu.com
17 December, 2014
1
Introduction
•
Background to development zones
in China
•
The origins and premise of the
Shanghai FTZ
•
Progress one year on
– Trade and customs
– Cross-border investment
– Finance
•
Outlook for the Shanghai FTZ
2
Background
China’s development zones
•
•
•
•
China borrowed from economic zone models elsewhere in Asia as it looked to pilot market-opening reforms –
Shenzhen SEZ launched in 1980 to attract FDI
Zones since rapidly multiplied in number and form, aiming to decouple an area from the national or regional
economy, exempting it from regulatory or infrastructural restrictions
Administrative powers vary, but zones can normally offer preferential policies – typically over customs tariffs,
land and business tax, relaxed business approvals, one-stop services
Economic focus has been developing entrepot trading, in turn stimulating emergence of export processing
activities. Also act as clusters for specific industrial or services activities
Name
No.
Examples
Description
Special economic zones (SEZs)
5
Shenzhen, Xiamen, Zhuhai,
Hainan, Shantou,
Large, demarcated areas with high autonomy. Focus
on entreport trading, export manufacturing.
Economic and technological
development zones (EDTZs)
210
High-tech development zones (HTDZs)
113
Kunshan (Jiangsu), Xi’an,
Chengdu
High-value added manufacturing. Similar to EDTZs,
but with incentives to encourage innovation, R&D
Free-trade zones (FTZs)
15
Shanghai, Tianjing,
Chongqing
Export processing and bonded warehousing. Exempt
from customs, tax refunds on trade.
New Areas
7
Pudong, Binhai (Tianjin),
Liangjiang (Chongqing)
Urban expansion and redevelopment
Tianjin, Dalian, Suzhou,
Lianyungang (Jiangsu)
Large areas, but more focused on specific industries
than SEZs. Technology-intensive investment.
3
Background
China’s development zones
•
High-profile success stories, but also lots of failures
– For every Shenzhen, there has been a Shantou
– Central government intervened in 1990s to
close swath of zones
– Others absorbed under urban municipal
structures
•
No guarantee of success
– Competent management with strong political
connections
– Proximity to foreign markets
– Economic rationale and strategy
•
Today, the purpose of development zones
increasingly called into question
– No longer decoupled from national economy
as a result of policy changes e.g. WTO entry,
tax incentives for foreign firms pared back
– FDI more focused on domestic market
– Criticism from corruption and fiscal
perspective
4
Shanghai FTZ
Origins and premise
•
There were local discussions of an expanded “Shanghai
FTZ” in 2012, but this may have been a bid for policy
support rather than a reform initiative
•
Only assumed wider significance once the new leadership
appointed in late 2012 took an interest, especially Li
Keqiang - visited Shanghai in March 2013
– Since become seen as his pet project - renamed
China (Shanghai) Pilot FTZ
•
Why Shanghai?
– Superior infrastructure and administration
– Existing FTZ and associated development zones
– Strengths in financial services, logistics and shipping
– Concentration of foreign investors
– 2020 goal to be a global financial centre
•
Launched hastily in September 2013
– But plans were skeletal, regulations unclear
– Haste before November 2013 plenum?
5
Shanghai FTZ
Origins and premise
6
Shanghai FTZ
Origins and premise
•
Shanghai FTZ clearly partly about harnessing strengths of existing developments areas under one unified unit
– Efficiencies from unifying administration
– Making customs inspection and quarantine more efficient
•
But also clear that the Shanghai FTZ was meant to be more than a traditional development zone, focused on
trade and export processing
– Incubator for major liberalising reforms, before being implemented elsewhere
– Reforms, not land/tax incentives, would attract investment
– Model was Shenzhen SEZ, “Reform 2.0”
•
Reforms discussed by officials before it was launched included
– Registration-based rather than approval-based FDI regime
– Opening of the services sector
– Making RMB convertible under capital account
– Liberalising interest rates
– Using RMB for cross-border settlement
– Reform of the foreign exchange management system
– Reforms to laws and government administration
7
One year on
Trade and customs
Area
What has been achieved
What hasn’t been achieved
Streamlined
customs
clearance
Relaxed quarantine and inspections compared to other zones for
people and commodities. Only shipping bill required for import,
rather than formal customs declaration. Reduced inspection
times for good imports. Bonded goods can be held for more
than 6 months in warehouses, unlike other bonded zones.
Controls on flows of people and goods still
apply when exiting the FTZ.
Expanded zero
tariff policies
Customs duties and import taxes exempt on imports into FTZ.
Lower tariffs on personal articles.
VAT and consumption taxes still apply on goods
sold outside FTZ. Personal articles tariffs still
high, including luxury.
Improved
customs
supervision
Electronic customs supervision, meaning no in-person
applications. Efforts to integrate inspection/border
control/customs management. No import/export quotas.
Online trade
facilitation
E-commerce firms allowed to hold goods tariff-free in bonded
warehouses facilitating direct mailing from overseas e.g.
Amazon. Cross-border e-commerce platform (Kuanjingtong) for
firms without local presence.
Lower logistic costs yet to result in lower prices
for consumers. Spending restriction imposed on
Kuanjingtong.
Demonstration
platforms
Waigaoqiao Directly Imported Goods (DIG) Market allow
overseas suppliers to reach customers without agents. Bonded
exhibition centres give firms a low-cost means of testing the
market for products.
Significance limited by access to only a limited
market of consumers. DIG model could be
extended to automobile imports.
8
One year on
Cross-border investment
Area
What has been achieved
What hasn’t been achieved
Liberalisation
of FDI regime
Foreign investment only needs to go through registration, rather
than approval system, under “negative list”. Controls on FDI in
23 services sectors liberalised, ranging from permission to
establish WFOE to relaxed JV requirements.
Investment in 139 sector remains banned
under 2014 list. JV requirements still high in
other areas.
Easier business
registration
Subscribed registration system rather statutory. One-stop
company registration process. Company registration completed
before licence is granted. Reduced capital requirements.
Company registrations still taking about one
month (vs a week in Hong Kong).
Encouraging
outbound
investment
Overseas direct investment (ODI) projects only require with FTZ
authorities, rather than approval from national authorities.
Online platform established to support overseas direct
investment. Offshore portfolio investments permitted for
qualified individuals and companies.
NDRC approval still required for ODI in some
areas, including “sensitive industries”. Clarity
lacking over qualifying individuals.
9
One year on
Finance
Area
What has been achieved
What hasn’t been achieved
Interest-rate
liberalisation
Market-based interest rate for foreign-currency deposits under
US$3m.
Liberalisation of interest rates on renminbi
deposits. Deposit insurance system.
Capital-account
opening
Two-way renminbi/forex cash-pooling via consolidated account
allows MNCs to easily transfer funds between onshore and
offshore affiliates. Free-trade accounts (FTAs) for residents and
non-residents to trial relaxed off-shore transfers and some onshore. Cross-border renminbi borrowing permitted, provided
limited to projects in FTZ and overseas.
No cash-pooling structure and regulations
onerous. FTAs ring-fenced in FTZ, with
controls imposed on flows onshore (with
some ‘permeation’). Conditions imposed on
offshore loan-raising.
Reducing foreign—
exchange controls
Free conversion of renminbi funds held in FTAs into foreign
currency. More porous capital-account.
Fully convertible renminbi.
Financial sector
development
Incorporation time shortened for foreign banks. Trial operations
for restricted license (wholesale) banks. International gold
exchange established September 2014, with offshore
investment permitted through non-resident FTAs.
Full access for foreign banks and brokerages
into domestic capital markets. Local
renminbi-denominated bond issuance.
Other commodity trading platforms under
discussion.
10
One year on
Summary
•
Against its stated purposes, the Shanghai FTZ has been a disappointment
– Benefits of the Shanghai FTZ relate mainly to trading and logistics activities
– Incremental financial reforms promise efficiencies, notably cash-pooling, but often burdensome
– Progress on promised ‘big bang’ reforms has been underwhelming, modest opening of the capital-account
and few developments in terms of financial sector, interest-rate or exchange-rate liberalisation
– Governance reforms also limited, rather than a significant scaling back of its role
•
Besides lack of significant reforms, there are practical problems in doing business in FTZ
– Lack of quality office space, mainly warehousing and small-scale manufacturing facilities; outside the main
financial centre
– Limited geographic scale acts as disincentive to foreign firms looking to expand into the services sector
– Administrative planning issues are widely reported, poor policy coordination and too many bureaucracies
involved; no umbrella agency established despite discussions
– Corporation tax is high, and incentives only apply to certain industries—disincentive to financial services
firms compared with Hong Kong and Singapore
•
Corporate interest has been mixed
– Over 12,000 companies registered in the FTZ since it was established, but few engaging in taxable activities
– Most engaged in trading (+50%), followed by services
– Foreign firms represent just over 1,500 of the total, most taking ‘wait and see’ approach
11
The outlook
Troubles ahead
•
Pace and nature of reform appears to have disappointed the central leadership
– Shanghai FTZ party secretary dismissed amid rumours of corruption in September 2014
– City bureaucracy conservative, economy dominated by SOEs and powerful vested interests
– Free-wheeling Shenzhen may have been a better choice
•
Many of the reforms trialled in FTZ now being expanded nationally, reducing Shanghai’s distinctiveness
– Customs measures adopted in FTZ have been rolled out elsewhere
– Cross-border cash-pooling now permitted in other places (under slightly tougher restrictions)
– FDI liberalisations set to be copied under new NDRC guidelines, BITs and FTAs
– Interest rates on forex accounts liberalised nationwide
– Interest rates on renminbi accounts also being gradually liberalised
– Shanghai-Hong Kong stock-exchange connect more significant from capital-account perspective
•
Timetable for the big financial changes resides with the central government
– Many of reforms are national in nature, do not suit pilot status
– Regulators biased towards conservatism and concerned about leakage and arbitrage in Shanghai FTZ
– National economic considerations will determine pace of reform efforts
12
The outlook
Troubles ahead
•
Shanghai has first-mover advantage, but
competition from other cities is heating
up
– Xi Jinping has called on Shanghai FTZ
to be expanded to other areas
– Provinces have discussed combining
existing zones e.g. Tianjin, Fujian and
Guangzhou, Chengdu
– Most areas will focus on trade and
customs issues, but PRD zone would
be very competitive
•
Meanwhile, policy focus of the central
government has shifted elsewhere
– Silk Road initiatives set to focus on
central, western and southern China
•
There is still a chance for Shanghai
– Talk of expanding FTZ to include
Shanghai CBD, although this will
prompt demands from elsewhere
13
Conclusion
•
Shanghai FTZ may have missed its chance to
be a major pioneer of reforms, like Shenzhen
in the 1980s
– Major policy shifts have been held back
by national government
– Modest innovations and improvements
it has introduced look set to be quickly
replicated elsewhere
– Initial planning may have been poorly
designed and rushed, but local
bureaucracy may not have helped
•
The failure of Shanghai does not necessarily
bode poorly for the broader reform agenda
– Consensus behind the big financial
reforms looks solid, but doubts persist
over timing and scale
14
Access China
Analysis
•
Regional economic, industry and
policy trends in China
•
31 provinces + 287 prefectures
•
Quarterly written reports on all
provinces and 40 largest cities
Data
•
Unique relationship with the
National Bureau of Statistics
•
Data cleaning, ranking and
benchmarking
Forecasts
•
State-of-the-art econometric
framework—dynamic time series
•
Data published on GDP,
demographics, income bands
published to 2020
15