Shanghai Free Trade Zone and Its Impact on Chinese Economy

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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 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.

Transcript of Shanghai Free Trade Zone and Its Impact on Chinese Economy

  • SOUTHWESTERN UNIVERSITY OF FINANCE AND ECONOMICS SCHOOL OF INTERNRATIONAL BUSINESS

    Shanghai pilot free trade zone and its impact on Chinese economy

  • - 1 -

    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 ............................................... - 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 ..................................................... - 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.......................................................................... - 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 frontiersareas 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 nations 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 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 all-

    round 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 Peoples 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 Shanghais 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.

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    29 September 2013

    The Shanghai Government published the Administrative Measures for FTZ in

    Shanghai MPG Order [2013] No. 7.

    November 2013

    The 3rd plenum of the 18th CPC Central Committee proposed to relax its

    restrictions on admittance of foreign investment and to speed up FTZs

    development.

    2 December 2013

    The PBOC released: Opinions of the Peoples Bank of China to Support FTZ in

    Financial Sector.

    6 January 2014

    The Chinese Central Governments 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 Councils Documents in FTZ.

    20 February 2014

    The PBOC Shanghai Head Office issued Circular of the Peoples Bank of China Shanghai Head Office on Supporting the Expansion of RMB Cross-border Business

    in FTZ (see Appendix IV); and Circular of the Peoples Bank of China Shanghai Head Office on the opinion of Shanghai payment institutions conducting Cross-

    border 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 Peoples 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

    Peoples 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.

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    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

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    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

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    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 cross-

    border 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 Councils 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

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    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 services.

    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 Xbox 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

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    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, promotes 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.

    Shanghais 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

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    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 Chinas 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

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    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 Shanghais 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,

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    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 Kongs financial industry with a platform to enter the Yangtze River Delta. On the other hand, Hong Kongs 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 citys 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;

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    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.

  • - 17 -

    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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