Treasury Today Country Profiles in association with Citi

Corporates ‘flocking’ to Shanghai Free Trade Zone

Birds eye view of Shanghai at night

Few initiatives have caused such a stir of excitement in China’s financial services community as the recent unveiling of the Shanghai Free Trade Zone (FTZ). The question now is will the reforms currently being piloted in Shanghai serve as a blueprint for future liberalisation in mainland China?

These are exciting times for multinationals operating in China. Since Gao Hucheng, China’s Minister of Commerce, unveiled the Shanghai Free Trade Zone (FTZ) on 29th September, corporates and banks have been flocking to the zone to register their involvement with the city’s authorities. But will the new FTZ live up to all the hype?

In a webinar hosted last month, Victor Fan, a Senior Analyst at financial consultant Kapronasia, outlined how he thinks the zone will develop in the coming years.

Fan began by explaining why China has chosen to establish the zone now. Since 1978, when the country first began to open its doors again to foreign companies, the country has created what many consider to be an economic miracle. However, the intense growth of the past decade is now beginning to decelerate. Clearly, China needed to find a ways to keep this growth going, which is the most likely motivation for establishing a FTZ in Shanghai, according to Fan.

Similar initiatives have worked in the past. In 1980, the reformist leader of the Communist Party of China, Deng Xiaoping, opened the door to foreign businesses for the first time by establishing Special Economic Zones (SEZs) in the city of Shenzhen. The move encouraged greater foreign direct investment (FDI) and provided a huge boost to the economy. It was also proved to be a significant turning point in the country’s history, with the liberalising reforms introduced in the zone later rolled out to the rest of mainland China.

A blueprint for wider reform

Fan, like many financial analysts in the region, thinks that the reforms implemented in Shanghai will, like Shenzhen in the 1980s, serve as a blueprint for future economic liberalisation across the rest of China. It’s not going to happen overnight, however. Even within the zone itself, Fan expects the reform process to be more incremental than revolutionary.

At the launch of the Shanghai FTZ, the city’s authorities published a list of sectors where foreign investment will be banned or restricted within the zone. Despite the ‘negative list’, which is mainly comprised of media organisations and internet businesses, companies and investors see this as a step forward. Until now, opportunities in China have been open only in sectors on a ‘positive list’. “It will open up more opportunities for investors,” says Fan. “And it will also make it easier for the government to take things off the list as the reform process continues. Previously they would have had to add them to the list.”

In addition to the announcement as to what companies and investors are already allowed to do within the zone, excitement is also building about what may be allowed in the future.

One of the most significant reforms promised for the Shanghai FTZ is the convertibility of Chinese renminbi (RMB) on the capital account. This will allow RMB to be exchanged for foreign currencies for investment and asset flows – in addition to exchange for trade which is already accepted. In addition to this step, Fan also believes that in the future authorities will introduce policies to liberalise interest rates and establish more favourable policies for logistics and international finance.

Challenges and opportunities

Exact timetables for these future reforms have, to date, not been forthcoming from the Chinese authorities. Even if RMB convertibility is introduced, it remains unclear how transactions could be permitted within the zone while remaining sealed off from the rest of the country. This degree of uncertainty, says Fan, poses significant challenges for companies and investors, who will naturally want to know precisely how the initiative is likely to develop before committing themselves.

Nevertheless, Fan advises that companies and investors should not hesitate to register in the Shanghai FTZ immediately. “Although many policies have not been executed yet or remain in the development stage, moving early and registering in the FTZ should be beneficial,” he says.

At present, registration fees are said to be as low as RMB 1, as a means of encouraging investment. In addition, Shanghai also has very favourable policies regarding wealth management which companies registered in the FTZ will be able to take full advantage of.