China: Shanghai - expectations disappoint on free trade zone
Published 30 September 2014
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Summary
The Shanghai Free Trade Zone (FTZ) celebrates its first year anniversary with the visit of Premier Li Keqiang and the removal of the man in charge amid allegations of corruption.
Detail
Premier Li’s visit
Premier Li Keqiang has heralded the first anniversary of the Shanghai FTZ with his first visit to the zone. He commented that he wanted foreign firms to be treated the same as Chinese firms and was interested more in what ministries could do to help, and less in what they have already achieved. This will revitalise hope that the reform programme will pick up pace.
Rumours of corruption
At the same time, Chinese authorities have confirmed that Dai Haibo, the man in charge of the FTZ, has been removed. Rumours suggest corruption allegations will follow. His removal comes at the end of a year of what many observers have described as lacklustre performance of the zone, but one which has witnessed important first steps. It is not yet clear who will replace him.
Boost to reform?
The launch of the Free Trade Zone in September 2013 triggered talk of the start of a new wave of economic reform. Premier Li Keqiang’s initially strong support was read as an indication the zone would pilot ambitious measures to simplify processes for foreign investment, support service sector development and financial opening. However, the Premier’s no-show at the opening event dispelled some of that optimism.
Disappointing first year
In fact, many observers complain that the FTZ has had no discernible impact so far; the Zone retains a very long ‘negative list’ of prohibited activities, limited financial liberalisation and slow progress on regulatory frameworks. HSBC is perhaps the only large UK company with a presence inside the zone. Indeed, the biggest discernible impact has been on the real estate market within the area itself, with prices increasing nearly twice as fast as the Shanghai average. The recent visit of Premier Li will reawaken hopes of an ambitious reform agenda.
Some progress
The achievements of the zone – important first steps - should not be overlooked. Relaxation around annual disclosure requirements ensure have made it much easier for foreign companies to establish a presence in China. Barriers to foreign competition have also been reduced in e-commerce, logistics and health care ensuring the strong presence of Amazon.com.
Attribution
Part of the problem is about attribution. China has introduced many different reforms in the past 12 months but it can be difficult to attribute them specifically to the FTZ. Reducing capital requirements for starting new firms, for example, has led to a year-on-year 60 percent rise in new business registrations. This policy was first trialled in the FTZ but was expanded nationwide so quickly that few recognise it as ‘product’ of the FTZ.
The emphasis seems now to be focused on ‘afterwards regulation’ to international standards; improving the ability of the Government to monitor, and control, commercial activity and risks under a less stringent regulatory environment. Progress on financial reform, initially heralded as a key area for reform, has been shaky. Those limited financial policies so far launched in the zone have already been rolled out further; interest liberalisation on foreign currency deposit (accounts holding less than USD3 million) now applies to the whole Shanghai area.
UK support
We have been actively engaged from the start, supporting the International Expert Consultative Group on the FTZ headed up by Sir Gerry Grimstone, the Chairman of Standard Life, and Lord Sassoon. Members of TheCity UK have produced a range of technical papers including on maritime insurance, bonded warehousing, legal frameworks, intellectual property and data collection. No other country has established such a comprehensive mechanism for cooperating with the China on the development of the FTZs.
These papers have been launched at events supported by the FCO’s Prosperity Fund, and have attracted high level support on both sides. In June, Oliver Letwin and Gao Hucheng opened our event on the ‘Prospects for EU-China Free Trade Agreement and China’s Free Trade Zones,’ while July saw over 100 policymakers and business leaders gather for the launch of three technical papers. A recent IP symposium chaired by Baroness Neville-Rolfe attracted lively discussion on the establishment of an IP court within the zone. This cooperation has been recognised at the highest levels, including at the recent Economic and Financial Dialogue in London.
Comment
The visit of Premier Li Keqiang is vitally important for an initiative that is widely seen to have been a disappointment. It shows that the central Government still attaches importance to the zone.
Disclaimer
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