SOUTHWESTERN UNIVERSITY OF FINANCE AND ECONOMICS SCHOOL OF INTERNRATIONAL BUSINESS
Shanghai pilot free trade zone and its impact on Chinese economy
TABLE OF CONTENT
INTRODUCTION………………………………………………………………………………………. – 2 BACKGROUND ……………………………………………………………………………………….. – 3 MAJOR TASKS AND MEASURES …………………………………………………………………. – 5 1) Accelerate the functional transformation of government ………………………………. – 5 Deepened reform in administration system ……………………………………………….. – 5 2) Opening up of investment sectors …………………………………………………………..
– 5 Opening up of service sectors ………………………………………………………………… – 5 Explore the “Negative List” administrative approach ……………………………………. – 6 Set up a system to support outbound investment……………………………………….. – 6 3) Promote the transformation of trade development approach………………………….. – 6 Promote the transformation and upgrading of trade ……………………………………. – 6 Elevate the capacity of the shipping service ………………………………………………. – 7 4) Deepen innovation and opening up of financial services ………………………………. – 8 Accelerate the innovation of the financial system ………………………………………..
The Essay on Trade Route Systems, Mediterranean And Indian Ocean
There was much diversity between Mediterranean Sea and Indian Ocean trade. For example, in the Mediterranean, sailors used square sails and long banks oars to maneuver among the sea’s many islands. But the traders of the Indian Ocean built sails the shape of triangles and did not use oars. Another example would be that the Indian Ocean ship builders would make the ships by piercing and tying ...
– 8 Enhance the financial service function …………………………………………………….. – 8 5) Improve regulatory supporting systems …………………………………………………… – 8 Strengthen protection through regulatory system enhancements ……………………. – 8 FUNCTIONS OF SHANGHAI FREE TRADE ZONE …………………………………………….. – 9 Basic Functions ………………………………………………………………………………….. – 10 Innovative Functions ……………………………………………………………………………. – 10 FEATURES OF SHANGHAI FREE TRADE ZONE ……………………………………………..
The Term Paper on Service Marketing
We have always had service industries, and indeed there are numerous biblical references to services as diverse as inn keeping, money lending and market trading. Over time, the service sector has grown in volume andin the importance attributed to it. According to Baker J.M et al, The Marketing Book 5th Ed, (2003), early economists saw services as being totally unproductive, adding nothing of value ...
– 10 BENEFITS OVER OTHER ZONES……………………………………………………………….. – 11 Financial benefit …………………………………………………………………………………. – 11 Customs benefit ………………………………………………………………………………….. – 11 Administrative benefit…………………………………………………………………………… – 12 Competitive regulatory and tax environment ………………………………………………. – 12 IMPACTS ON CHINESE ECONOMY ……………………………………………………………..
– 12 FINANCE…………………………………………………………………………………………… – 12 COMMERCE AND TRADING…………………………………………………………………… – 13 REGIONAL ECONOMIC ………………………………………………………………………… – 14 FUTURE DEVELOPMENT OF SHANGHAI FREE TRADE ZONE ………………………….. – 15 Expand financial service functions…………………………………………………………… – 15 Expand functions of headquarter economy ………………………………………………… – 15 Expand trade service functions………………………………………………………………..
The Term Paper on Free Trade Government China Principles
No Shoes, No Shirt, No Service For the past few months, I have been focusing on the events and the principles behind the founding of our nation. During these studies, I often wondered how some of the ideas we cling to became entrenched in our paradigms of perception. For instance, there are words that have become taboo because of the ways they have been used. They are so taboo, in fact, that it ...
– 15 Expand shipping service functions…………………………………………………………… – 16 CONCLUSION ……………………………………………………………………………………….. – 17 REFERENCES:………………………………………………………………………………………. – 18 –
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Introduction
A traditional Free Trade Zone is an area within which goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Free-trade zones are organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade. The concept of free trade zones in China is not new. In the 1980s, a number of Special Economic Zones (SEZ), the most famous of which was Shenzhen, which allowed foreign companies the freedom to invest and build factories, kick -starting the nation’s rapid growth. Such reforms eventually spread throughout the entire nation, turning China into the workshop of the world and helping China to become the 2nd largest economy in the world. Shanghai Free-Trade Zone (Shanghai FTZ) is the first free trade area in mainland China launched on September 29, 2013 by Chinese Premier Li Keqiang. Official name of Shanghai FTZ is China (Shanghai) Pilot Free -Trade Zone (CSPFTZ), the zone covers an area of 29 km2, integrating four existing bonded zones — Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.
The Term Paper on Free Trade With China 2
ChinaChina is a Communist Republic government. This means that the government regulates, sets rules, and runs most business inChina. However, the increase in a worldwide economy around the middle of the 20th century caused China to evaluate theirgovernment and decide that something must be done to stimulate the Chinese economy and bring entrepreneurs to China otherwisethey will be left behind in ...
The new zone is being seen as the most important attempt at reform since Communist leader Deng Xiaoping, the architect of China’s transformation to a market economy, designated Shenzhen on the border with Hong Kong a special economic zone in 1980. The establishment of the Shanghai free -trade zone is a significant move for China to conform to new trends in the global economy and trade. Focusing on the strategic requirement of “serving China from global perspective ”and the strategic mission of “construction of four centers in shanghai”, the construction of Shanghai Pilot Free-Trade Zone is to actively explore innovative management model of government in trade and investment in China, open service industry wider to the rest of the world. China (Shanghai) Pilot Free -Trade Zone will be progressively developed into a zone featured with investment and trade facilitation up to international standards, free conversion of currencies, convenience and efficiency, and internationally recognized legal environment. Hence, it will be prompted to be a pilot zone for implementation of new rules for international investment, a spearheading zone for trade in services innovation, a cluster zone for offshore industrial system, a precursor zone for overseas investment services, an antecedence zone for improved supervision and a demonstration zone for innovative government administration. The establishment of China (Shanghai) Pilot Free Trade Zone is a significant measure taken by the Party Central Committee to promote reform and opening-up under the new situation and undertakes a major task to explore new ways and accumulate new experience for deepening of reform and opening up in an allround way.
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BACKGROUND
With its economic growth rate falling and its labor costs climbing, China was no longer able to rely on exports alone to support its economic growth. Considering its economy flagged by excess production capacity and high energy consumption, the country needed a way to deepen its financial reform and transform its economic structure. December 2003
Siwei Cheng, former National People’s Congress Vice Chairman, proposed that China is ready to set up a reform pilot for the transformation of bonded zones into free trade zones. The selected date of the reform pilot was to be declared soon. . March-end 2013
Keqiang Li, Premier of the State Council, during his research trip to Shanghai’s Waigaoqiao Bonded Zone encouraged the city to establish a pilot free trade zone on the basis of the existing comprehensive bonded zone. 14 May 2013
The FTZ is approved to become a national-level project. June 2013
Having been revised and improved, the General Plan for China (Shanghai) Pilot Free Trade Zone (the “Plan”) is submitted for approval to the Ministries and Commissions under the State Council. July 2013
The State Council executive meeting approved the General Plan (“the Plan”) in principle. 10-11 July 2013
In the fifth round of China-US Strategic and Economic Dialogue, China State Councilor Yang Jiechi and US Secretary of State John Kerry agreed to take measures to deepen bilateral trade and investment relations, as well as to establish an open environment for trade and investment. 22 August 2013
The Press Office of the Ministry of Commerce announced that the State Council has approved the establishment of the FTZ, and that the Plan would be published after the completion of relevant legal procedures. 27 September 2013
The State Council published the Plan on its official website in its release of Guofa [2013] No. 38. -3-
29 September 2013
The Shanghai Government published the Administrative Measures for FTZ in Shanghai MPG Order [2013] No. 7. November 2013
The Term Paper on The Silk Road Trade China Chinese
The four hundred years between the collapse of the Han dynasty (206 B. C. E. - C. E. 220) and the establishment of the Tang dynasty (618-906) mark a division in the history of China. During this period, foreign invasion, transcontinental trade, and missionary ambition opened the region to an unprecedented wealth of foreign cultural influences. These influences were both secular and sacred. Nomads, ...
The 3rd plenum of the 18th CPC Central Committee proposed to relax its restrictions on admittance of foreign investment and to speed up FTZ’s development. 2 December 2013
The PBOC released: Opinions of the People’s Bank of China to Support FTZ in Financial Sector. 6 January 2014
The Chinese Central Government’s Official Web Portal published Decision of the State Council on Temporary Adjustments to the Administrative Approval Items or Special Administrative Measures on Access Prescribed in Relevant Administrative Regulations or State Council’s Documents in FTZ. 20 February 2014
The PBOC Shanghai Head Office issued Circular of the People’s Bank of China Shanghai Head Office on Supporting the Expansion of RMB Cross-border Business in FTZ (see Appendix IV); and Circular of the People’s Bank of China Shanghai Head Office on the opinion of Shanghai payment institutions conducting Crossborder RMB payment business. 25 February 2014
The PBOC Shanghai Head Office issued Circular of the PBOC on removing the ceiling of interest rate for small-denomination deposits in foreign currencies in FTZ. 28 February 2014
The State Administration of Foreign Exchange Shanghai Branch issued Circular of the State Administration of Foreign Exchange Shanghai Branch on Issuing Implementing Rules for Foreign Exchange Control to Support the Construction of FTZ. The PBOC Shanghai Head Office issued Circular of the People’s Bank of China Shanghai Head Office on Practically Conducting the Anti-money Laundering and Anti-terrorism Financing Work in FTZ. 5 March 2014
In the Shanghai group discussion of the second session of the 12th National People‘s Congress, President Xi Jinping stressed the construction of FTZ as a national strategy and asked the nation to “construct bravely, try boldly, reform freely” adhering to the international rules. And, thereafter, summarized the experiences gained on constructing FTZ, which can be promoted nationwide. -4-
MAJOR TASKS AND MEASURES
Based on the unity of openness expansion and system reform, and the unity of functional development and policy innovation, the China (Shanghai) Pilot Free Trade Zone aims to develop a framework in line with international norms for investment and trade. To do so, one needs to bear in mind the strategic requirements of going to the world and serving the nation, as well as the strategic task of building “The Four Centers of Shanghai, and take actions to experiment step by step with risks under control.
1) Accelerate the functional transformation of government
Deepened reform in administration system The China (Shanghai) Pilot Free Trade Zone will accelerate the functional transformation of government and governmental administrative management innovation. An administrative management system meets and fits with international trade and investment standards will be established. The focus of administrative management procedures will shift from prior approval to mid-event control and subsequent supervision. A service pattern will be set up to materialize one-off acceptance, integrated examination and approval, and efficient operation. An online information platform will be established to consolidate information and improve information sharing amongst various departments. A comprehensive assessment mechanism of industry information tracking, supervision and collection will be established, to strengthen the tracking, administration and supervision of activities outside of the zone conducted by entities registered in the China (Shanghai) Pilot Free Trade Zone. A joint supervision and enforcement system will be implemented to cover the areas of quality and technical supervision, food and drug supervision, intellectual property, industry and commercial administration, and tax administration to enhance efficiency. In addition to relevant administrative authorities, the social forces are also encouraged to take an active part in market supervision. Transparency in administrative management will be enhanced, and the information disclosure mechanism that reflects the participation of investors and is in line with international norms will be established. To protect the interests of investors, various administration reforms will be put in place, for instance enhancing fair competition, and allowing qualified foreign investors to remit investment gains at their discretion. An intellectual property related dispute resolution and assistance system will be established.
2) Opening up of investment sectors
Opening up of service sectors The financial services, transportation services, commerce and trade services, professional services, cultural services, and public services sectors are selected to -5-
be enlarged and opened (for a detailed list please refer to the appendix), and market access restrictions such as requirements concerning the qualification of investors, limitations on foreign participation, restrictions concerning business scope, etc., (except in respect of banks, information and communication services) will be suspended or cancelled, in order to create an environment of equal market access for the benefit of all investors. Explore the “Negative List” administrative approach The China (Shanghai) Pilot Free Trade Zone will reform the administrative approach of foreign investment based on international norms. Trial national treatment on investment permission and a “Negative List” mechanism will be implemented within the zone. For the projects that are not stated in the “Negative List”, foreign investors and domestic investors will receive the same treatment, by going through filing procedures instead of approving requirements (with the exception of areas specifically defined by the State Council).
Shanghai Municipal People’s Government will be in charge of the project filing procedures. The approving requirement on foreign investment contracts and Articles of Association will be replaced by a filing procedure with Shanghai Municipal People’ s Government, with the same follow up procedures finished according to the current laws and regulations. The registration process with the Administration of Industry and Commerce will be aligned with the business registration system reform, and the process will be optimized. National security review system will be improved, and pilot national security review on foreign investment projects will be trialed in the China (Shanghai) Pilot Free Trade Zone to constitute a safe and efficient open economic system. A foreign investment administrative system that is aligned with international standard will be set up. Set up a system to support outbound investment The China (Shanghai) Pilot Free Trade Zone is aiming at the reform of outbound investment administration by principally implementing the filing system on the setup of overseas companies and on the general outbound investment projects. The Shanghai Municipal People’s Government will be in charge of the filing procedure on general outbound investment projects to facilitate the convenience on outbound investment. A new investment service enhancement mechanism will be created to strengthen the post outbound-investment administration and service, and to set up an information-monitoring platform shared by multiple government departments for statistics and annual inspection purposes. Various types of investors in the China (Shanghai) Pilot Free Trade Zone are encouraged to conduct outbound investment in different forms. SPVs specializing in overseas equity investment are encouraged to be set up in the China (Shanghai) Pilot Free Trade Zone, and qualified investors are encouraged to establish fund of funds for making offshore equity investments.
3) Promote the transformation of trade development approach
Promote the transformation and upgrading of trade -6-
The China (Shanghai) Pilot Free Trade Zone is cultivating new trading types and functions, aiming to increase China’s competitive advantage and enhance their position in the global trade value chain by focusing on the development of technology, brands, quality and service. Multinational companies are encouraged to set up Asia-Pacific regional headquarters and/or operation centers with comprehensive functions of trading, logistics, settlement, etc. More efforts will be made to promote Shanghai as the international trade settlement center, and to expand the function of the special account on cross-border receipt or payment and financing under trade in service. Enterprises in the China (Shanghai) Pilot Free Trade Zone will be supported to develop offshore business. Enterprises are encouraged to employ an overall plan in international and domestic trade to integrate the development of domestic and foreign trading business. International commodity trading and resource configuration platform will be explored to trade energy products, basic industrial raw materials and agriculture commodities. The ongoing pilot bonded futures delivery will be expanded and improved and the warehouse receipt financing and other functions will be extended.
The establishment of outbound cultural trade bases will be accelerated. The outsourcing service sectors include bio-pharmaceuticals, software and information, management consulting, data services etc. will be encouraged. Financial leasing companies will be allowed and encouraged to set up project companies in the China (Shanghai) Pilot Free Trade Zone and to carry out domestic and international leasing business. Third-party inspection and appraisal institutions are encouraged to set up with appraisal results be acceptable in accordance with international standards. High-tech and value-added maintenance services will be trialed in the China (Shanghai) Pilot Free Trade Zone. Cross border e -business service function will be cultivated, and a system covering customs, inspection & quarantine, tax refunds, cross-border payment and logistics will be set up to support cross-border e-business. Elevate the capacity of the shipping service The China (Shanghai) Pilot Free Trade Zone will leverage on the Waigaoqiao Port, Yangshan Deep-Water Port and Pudong International Airport to form a shipping development system and operation model that will have strong global competitive advantages.
Shipping related services such as shipping financing, international ship transportation, international ship management, and international ship brokerage, will be proactively encouraged. Additionally, the development of freight index derivatives will be accelerated. Transition and LCL businesses will be further promoted. Foreign ships owned or indirectly owned by Chinese invested companies are allowed to pilot the coastal shipping between domestic coastal ports and Shanghai port. Pudong International Airport is encouraged to increase the number of flights for cargo transition. By utilizing the geographic advantages of Shanghai and the preferential taxation on Chinese “flag of convenience?ships, qualified ships will be encouraged to register in Shanghai. The China (Shanghai) Pilot Free Trade Zone will implement the international ship registration policy as piloted in Tianjin. The application process on permitting international shipping will be simplified to create a more efficient ship registration system.
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4) Deepen innovation and opening up of financial services
Accelerate the innovation of the financial system Under proper risk control, the China (Shanghai) Pilot Free Trade Zone will pilot RMB capital account convertibility, interest rate liberalization, and the crossborder use of RMB. In China (Shanghai) Pilot Free Trade Zone, the assets by the financial institutions will be at market rate. The China (Shanghai) Pilot Free Trade Zone will explore the trial of a foreign exchange administrative system that is in line with international practice to better facilitate trade and investment. Enterprises are encouraged to leverage on both domestic and international market resources to liberalize cross-border financing. Administration on foreign debt will be further reformed to facilitate cross-border financing. Foreign exchange centralized operation by multinational companies’ headquarters will be enhanced to encourage the setup of regional or global treasury centers in Shanghai. A mechanism needs to be established to associate financial reforms in the China (Shanghai) Pilot Free Trade Zone and Shanghai’s development into an international financial center. Enhance the financial service function The finance sector will be fully opened to private investors and foreign invested financial institutions. Foreign-invested and Sino-foreign equity joint venture banks will be allowed to incorporate in the China (Shanghai) Pilot Free Trade Zone. Platforms for international transactions will also be permitted to be established in the China (Shanghai) Pilot Free Trade Zone by financial markets. The oversea companies will gradually be allowed to engage in commodity futures trading. Financial market innovations are encouraged. Equity escrow institutions will be supported to setup comprehensive financial service platform in the China (Shanghai) Pilot Free Trade Zone. The cross-border RMB reinsurance business is also encouraged to cultivate reinsurance market.
5) Improve regulatory supporting systems
Strengthen protection through regulatory system enhancements A regulatory system of high standard investment and trade rules will be developed rapidly to serve the needs of the China (Shanghai) Pilot Free Trade Zone. In regard to the content of the pilot, some administrative regulations and provisions in the State Council’s documents will be terminated according to the prescribed procedures. Among these regulations and provisions, certain administrative examination and approval requirements under “Law of the People’s Republic of China on Wholly Foreign Owned Enterprises”, “Law of the People’s Republic of China on Sino-Foreign Equity Joint Venture Companies”, “Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Venture Companies” will be temporarily adjusted and such adjustment will be tentatively implemented in the next three years started from 1 October 2013. The government departments shall -8-
support the expansion and opening of service industry in the China (Shanghai) Pilot Free Trade Zone, the deepening of pilot reforms on the implementation of “National Treatment” on investment permission and “the Negative List” management approach, and solve the problems in regulatory protection during the pilot period. The Shanghai Municipal People’s Government will establish an administrative system through local legislation in correspondence to the demands of the China (Shanghai) Pilot Free Trade Zone.
FUNCTIONS OF SHANGHAI FREE TRADE ZONE
The Shanghai Free Trade Zone, in spite of its name, differs from conventional free trade zones in the following two aspects. First, the functions of Shanghai Free Trade Zone are far more comprehensive than those of traditional free trade zones in terms of both openness and international cooperation. In regards to both economic theories and empirical experience, free trade zones are a special sort of regional trade agreements (RTA).
Depending on the degree of regional economic integration, RTAs can be categorized into five varieties including free trade zone, tariff treaty, common market, economic union, and full economic integration. Conventional free trade zones focus on trade liberalization and mainly tackle tariff and non-tariff barriers. By comparison, common markets not only eliminate such barriers but also promote trade liberalization in services and facilitate the free flow of production factors such as capital as well as labor. Within the Shanghai Free Trade Zone, tariff and non-tariff barriers will be eliminated so that goods will be able to flow freely across borders. Furthermore, international trade in services will be liberalized, while restrictions on the movement of both capital and personnel will be relaxed. Therefore, when it comes to functionality and economic integration, the Shanghai Free Trade Zone has exceeded the definition of free trade zones and is consistent with that of a common market. Second, conventional free trade areas are formed after two or more consenting sovereign states or economies negotiate free trade agreements that eliminate tariff and non-tariff barriers. In contrast, the Shanghai Free Trade Zone is a unilateral initiative that does not require reciprocal treatment. Being neither a sovereign state nor an independent economic entity, Shanghai will find it difficult to strike any substantive trade deals with other parties. Clearly, according to conventional definition, the Shanghai Free Trade Zone is neither a free trade zone nor a regional trade agreement. Instead, it strives to become a free port, which is similar with Hong Kong in terms of openness to trade and investment as well as the free flow of capital and personnel. In other words, the Shanghai Free Trade Zone, with an area of 28.78 square kilometers, could be considered a microcosm of Hong Kong, a free port that spans about 1,100 square kilometers.
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Basic Functions
International Trade. All sorts of trade can be conducted in the free trade zones, including import and export, re-export, offshore trade, service trade, etc. Modern Logistics. A comprehensive logistics service is available in the free trade zones, including warehousing for bonded goods, procurement and distribution, supply chain management, etc. Exhibition and Trade. Merchants can have their bonded cargos and commodities exhibited in the free trade zones and a whole set of services is available for import and export agents, exhibitors and companies’ after-sale. Research and Development and Manufacturing. Companies in the free trade zones can carry out manufacturing, software development, research and development of pharmaceutical products and other outsourcing service s.
Innovative Functions
Financial Leasing. Besides launching aircrafts and single-vessel leasing projects and other special purpose vehicle leasing projects, other SPV projects will be extended to marine engineering, complete sets of heavy equipment, railway transportation equipment and other areas. Build up an assets securitization and transferring platform, providing high-end shipping financial service. Settlement Center for International Trade. Simplify foreign currency settlement procedures on the basis of each company’s credit record. Allow qualified enterprises to open a special foreign currency account to deal with international trade settlement. Bonded Futures Settlement. Bonded cargos can be used as the subject matter for futures contracts in domestic futures transaction platforms. International Container Reconsolidation Service. Cargos that have arrived at Shanghai ports can be sorted and re-packed inside the free trade zones to be distributed as new containers to overseas destinations.
FEATURES OF SHANGHAI FREE TRADE ZONE
The Zone is being used as a testing ground for a number of economic and social reforms. For example, the sale of video game consoles, banned in China since 2000, will be allowed within the zone, with Microsoft aiming to have its X box on the market by late April. Consoles and individual games will still be subject to a case by-case approval by the Shanghai Municipal Administration of Culture, Radio, Film & TV for manufacture and sales in China. The State Council released the Overall Plan for China (Shanghai) Pilot Free Trade Zone (the “Plan”) on September 27. In terms of the contents of the Plan, Shanghai Pilot Free Trade Zone has three features: First, the proactive and intrinsic opening is reflected. At present, China has faced the key moment of reform and opening. Facing with new circumstances and new tasks, there must be new methods, new modes and new trials to realize the promotion of development, reform and innovation – 10 –
through opening. Shanghai Pilot Free Trade Zone is a new trial for China to expand reform and opening. Second, the core is the innovation of system. Shanghai Pilot Trade Zone reflects the national strategy, and is of high level of reform and innovation. In the pilot policies, there are a lot of aspects concerning innovation of systems. For example, to promote reform of foreign investment management mechanism and to pilot negative list management mode that, in sectors beyond the negative list, the approval system is altered into filing system based on the system of consistency between domestic and foreign investment. This is a major breakthrough in the reform of administration system. Third, Shanghai Pilot Free Trade Zone features as a model. Shanghai Pilot Free Trade Zone acts as the “test field” for reform and opening, to explore new thoughts and new methods for China to expand opening and intensify reform and form replicable and extendable experience, to make a demonstration for China and bring its role into full play to serve the whole country. For example, the early opening of relevant service sectors and early and pilot implementation of convertibility of RMB capital accounts, interest rate liberation of financial markets, cross-border use of RMB will accumulate important experience for further and comprehensive intensification of reform and opening in the future.
BENEFITS OVER OTHER ZONES Financial benefit
Foreign banks will be able to establish WFOE or majority-controlled subsidiaries within shorter time frames. The financial institutions are expected to progressively be granted licenses for cross-border financial products. The promotion of renminbi convertibility and relaxed administrative controls will greatly facilitate treasury cross-border fund management for companies – financial and non-financial alike – with regional headquarters in China. Different than other bonded areas, the biggest feature of FTZ is the special custom monitoring system called ‘Domestic but out of Customs’, which means ‘open the A line (Free Trade Zone and boarder line) and control the B line (Free Trade Zone and Non Free Trade Zone)’. This expedited clearance of goods and materials is beneficial in terms of cost and time for logistics companies specifically.
Customs benefit
Overseas shipments will not need customs clearance until a later stage, simplifying the operation of logistics companies within the FTZ. Reducing costs and complexities involved in the logistics could further encourage international manufacturers to set up a regional manufacturing and logistics hub in Shanghai.
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Administrative benefit
An important reform which will attract foreign investors is a drastic simplification of the administrative burden of applying for approval and registration within the FTZ. Foreign investors within the zone will be subject to the same application procedure and requirements as domestic investors and the process will require a single application at a single location, provided their business scope is not contained within the “Negative List” for which special approval is needed.
Competitive regulatory and tax environment
New tax policies are being adopted to support innovative business models. Firms may choose to pay Import taxes that apply to imported components, or the Import taxes applying to the finished components.
IMPACTS ON CHINESE ECONOMY
Currently, the liberalization of trade and investment and integration of regional economy have become a trend and a new drive for the growth of global economy. Shanghai Pilot Free Trade Zone, under the guidance of accelerating implementation of a more active and positive opening strategy, promote s reform and development with opening in a way of following the new trend of global economic and trade development. Shanghai FTZ combines expansion of opening with reform of systems, cultivation of functions with policy innovation in a method of early and pilot implementation, controllable risks, step-by-step promotion and gradual improvement to form a basic system framework that connects with the general international investment and trade rules. Shanghai’s Free Trade Zone (FTZ) has been established to increase the trade and investment flows in the country. The main principles of it are: experimenting with RMB convertibility, liberalization of interest rates and cross -border usage of RMB, reduced red-tape, and less governmental control over financial flows. Overall, the government hopes that the establishment of the FTZ will play a part in China integrating further in the global economy and will promote further economic development at home.
FINANCE
With respect to the financial sector (banking, health medical insurance, financial leasing), the goal of the new zone is to promote financial innovation, interest liberalization and full capital account convertibility. Over the next several years restrictions in all these areas will be loosened. Moreover, investment approval for the zone is shifting to a negative list system, meaning investment areas not explicitly prohibited will be approved. Following the State Council announcement, the CBRC and CSRC, released follow-up guidelines for banks and securities firms seeking to establish operations in the zone. From a broader perspective, the FTZ has the potential to promote two key areas of economic reform, helping Chinese firms expand abroad and strengthening – 12 –
domestic capital markets. China has long pushed domestic firms to expand abroad as part of the “going out” strategy, but overseas investment is still small relative to the size of China’s economy and largely dominated by state -owned enterprises. Expanding abroad may become easier now with new regulations that encourage firms within the FTZ to seek financing abroad and allow domestic banks to more easily offer cross-border financial services. This should make overseas expansion easier for smaller firms who often lack strong banking relationships and have limited access to foreign financing. Chinese capital markets should also receive a boost from the FTZ. Qualified individuals and companies in the zone will be allowed to invest in foreign and domestic equity and futures markets. This represents a break from the existing QFII and QDII programs where investment quotas are allocated by SAFE. Instead of a quantitative restriction on inflows and outflows, there will be a geographic restriction. Depending on how easy it is for financial firms to set up operations within the zone, these new rules could help boost the foreign share of portfolio investment in China which right now stands at a measly 4 percent of GDP. The key dynamic for policymakers regulating the FTZ will be how to promote substantive liberalization without spreading financial risk to the broader economy. To be successful, the FTZ will need to make it easy for both foreign and domestic firms to establish operations and move capital across the border. However, due to the fungibility of capital, financial flows are very difficult to contain within set geographical confines. To counteract this, the requirements for establishing within the zone will have to be tight enough to keep out firms without legitimate international operations. This should help limit, but not eliminate, the impact of the zone on the rest of the economy.
COMMERCE AND TRADING
Liberalization and regulatory measures should proceed side by side and liberalization should be progressive. The experience of the pilot must be replicable and suitable for promotion on an extensive scale in China. The impact of the establishment of the Shanghai free trade zone on commerce will likely be indirect, progressive and long-term. In commercial services, the provision of value-added telecommunications services and the sale and services of games consoles and arcade games will be permitted in the free trade zone. With the further liberalization of value-added telecommunications services, global cloud computing heavyweights are expected to rush into the zone. The liberalization of the sale of games consoles and arcade games and the provision of related services imply the lifting of the ban previously imposed on these products and services. This will not only spur the growth of those industries but will also further stimulate innovation in the development of smart TVs which have witnessed rapid growth in recent years. The outside world has pinned much hope on permission to operate duty-free shops in the free trade zone, but there was no mention of this in the General Plan. The fact is, industries will be the dominant function in the zone, while residential and livelihood functions only play a supporting role. Moreover, it is reckoned that duty free shops will form a price trough, causing purchasing power to move in from – 13 –
outside the zone. As such, it will not have much effect in bringing back the purchasing power for luxuries that has drifted offshore (because prices at the duty-free shops will have no advantage over prices in Hong Kong).
Thus, they are of little help to the growth of the domestic market and economy. On the negative list for the wholesale and retail sectors, there are not many categories that are subject to special control. The list only covers important commodities like grain, cotton, vegetable oil, tobacco, salt, chemical fertilizers, agricultural films, and crude oil and finished products that have a vital bearing on the national economy and the people’s livelihood, some audio-visual products and relics, as well as direct selling, mail order selling and online selling. Foreign direct selling and mail order businesses like Amway and Mecoxlane have in fact been operating in the Shanghai market long before this. Of course this is just the negative list for 2013. The list is expected to be trimmed rather than expanded in 2014 and 2015. The scope and content of liberalization in the Shanghai free trade zone are expected to gradually expand based on progress in such areas as implementation of liberalization pilots, improvement of management and adaptability of companies.
REGIONAL ECONOMIC
The Shanghai Free Trade Zone will help usher in a new phase of reform and thus provide the necessary conditions for economic upgrade. Even though the Shanghai Free Trade Zone has been in motion for only eight months, it has unleashed a ripple effect, with Guangdong, Tianjin, Xiamen, Chongqing, and Zhoushan having submitted applications for setting up free trade zones. Recently, Guangdong and Hong Kong have brought up the idea of a free trade zone comprised of Guangdong, Hong Kong, and Macau, which will help Hong Kong better take advantage of its strengths and unique position in the global economy. In order to boost growth in the Pearl River Delta, trades in goods and services will be liberalized, while financial innovation and cooperation will be encouraged. As more and more free trade zones emerge, trade liberalization will become increasingly full-fledged. As for Shanghai, the free trade zone will help the city achieve its goal of becoming a global economic center. In the past two years, due to the lack of reform measures, the pace of Shanghai’s economic growth was near rock bottom in the nation. Now that the free trade zone has provided Shanghai with a great opportunity to open up its economy and develop offshore trade and finance, the city will over time emerge as a trading, shipping, and financial center. For instance, when it comes to regional headquarters of multinational corporations, supply chain management is a core function. For the time being, most of Fortune 500 companies have entered the Shanghai market, and the Shanghai Free Trade Zone will help the city become a hub of supply chain management. From a regional perspective, the Shanghai Free Trade Zone will drive economic growth in the Yangtze River Delta, which is currently the largest regional economy in China and aims to become a world-class cluster of cities. With modern logistics, quality services for commerce, and financial innovation, the Yangtze River Delta will be better equipped to boost growth. For instance, as it stands now, about 90% of container cargos in Shanghai Port originate from the Yangtze area. Therefore, – 14 –
provinces and cities in the region will all benefit from the Shanghai Free Trade Zone and turn in strong economic performance. As for Hong Kong and especially its financial services sector, the Shanghai Free Trade Zone will inevitably bring about challenges. Hong Kong should proactively deal with these challenges and turn them into opportunities. On one hand, the free trade zone will provide Hong Kong’s financial industry with a platform to enter the Yangtze River Delta. On the other hand, Hong Kong’s mature legal system, high degree of internationalization, and excellent business environment makes the city an ideal place to connect the Shanghai Free Trade Zone and global markets. In the future, Hong Kong and the Shanghai Free Trade Zone can cooperate extensively in the areas of offshore trading, cross-border financing and investments, offshore RMB lending, RMB bond issuance, trading, and settlement, as well as professional services such as legal, accounting, and management.
FUTURE DEVELOPMENT OF SHANGHAI FREE TRADE ZONE
Shanghai Free Trade Zone is an engine to accelerate the city’s construction of “four centers” – Financial, Economic, Trade, and Shipping. Below you can see a list of future development of Shanghai FTZ.
Expand financial service functions
Support the setup of mother funds for equity investment in foreign countries; Private capital and foreign-funded financial institutions practice; Build financial transaction platform ,adapting to international practice; Overseas enterprises are permitted to engage in commodity futures trading; Reform the management modes of external debts; Support RMB cross-border reinsurance business; Back the establishment of overall financial service platform.
Expand functions of headquarter economy
Encourage multinationals to set up their Asia-Pacific regional Develop operation center that integrates such functions as trade, logistics and settlement and the like Deepen the pilot program in international trade settlement and expand such functions as cross-border payment for trade in services, payment in foreign exchange for non-trade purposes and financing under the special accounts Deepen the pilot management of centralized operations of the foreign exchange funds for multinational companies’ headquarters and promote multinational companies to set up their regional or global fund management centers.
Expand trade service functions
Subsidiaries of financial leasing projects; Commodity trading; Bonded delivery of futures; Construction of international cultural trade base; – 15 –
R&D and service outsourcing; Hybrid global maintenance and testing base; The Cross-border e-commerce platform; Bonded exhibition and trading platform.
Expand shipping service functions
Develop shipping finance; International transit and LCL; International shipping; Transaction of freight index derivatives; International ship management; Explore the establishment of international ship registration system; International shipping brokerage and other industries; Foreign ships owned or indirectly owned by Chinese -invested companies are allowed to pilot the coastal shipping.
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Conclusion
The creation of a Shanghai Free Trade Zone is the Chinese government’s latest major initiative in adapting to global economic development trends and furthering its opening up to the outside world. It is conducive to cultivating new advantages for China in the face of global competition. Moreover, it will help build a new platform for its cooperation with other countries and regions, develop new space for economic growth and build an “upgraded version” of the Chinese economy. The Shanghai FTZ has four main goals. The first is achieving zero tariffs on all merchandise traded, including agricultural products. The second involves protecting intellectual property rights, and making sure that labor, environmental and safety conditions meet international standards. The third centers on enhancing economic and regulatory fairness and transparency, and removing subsidies and preferential support for specific industries and state -owned enterprises. The fourth is to fully liberalize the financial services industry, and open up the capital account to facilitate the free convertibility of currency and movement of capital. The Shanghai Free Trade Zone should also aim to include all major industries to create a fair sense of competition among state-owned, private and foreign businesses. It should follow the negative-list approach of granting access to any businesses that are not prohibited, and change the traditional method of examining and approving tenants to a registration-based system. The Shanghai Free Trade Zone has enormous potential and is full of possibilities. However, one should not lose sight of the fact that the zone is still a pilot project, while its experimental nature suggests that risks and challenges will be unavoidable. For instance, arbitrage opportunities may arise while the capital account is being opened; a new legal system may be necessary; and the functions and mentality of government may need to be changed. In order for this experiment to succeed, these major issues will have to be resolved.
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References
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