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ZONING IN ON REFORM
Shanghai Free Trade Zone a doorway to China's evolving economic strategy

Shanghai boasts the world's largest container port and is a major transportation hub

Jessi Zang, a Beijinger who uses haitao - overseas purchase service - is delighted at the news that U.S. e-commerce giant Amazon is setting up base in the China (Shanghai) Pilot Free Trade Zone (the Shanghai FTZ). Zang, the mother of a baby girl, was first attracted to haitao last year when she bought maternity and baby products from abroad for her pregnancy. She had wanted to buy a Dutch milk powder brand, finding it cost less than 200 yuan ($33.3) when bought via Amazon, even after taxes and delivery charges, while a domestic website was selling the same product at over 300 yuan ($50). But she found creating an Amazon account too complicated and eventually asked her friends abroad to get the product for her.

So the upcoming opportunity to access all products available on Amazon through its Chinese website, pay in RMB, enjoy lower shipping charges and get faster delivery to boot is a godsend for Zang and other Chinese shoppers. The credit for that goes to the pioneering Shanghai FTZ launched in September 2013.

Diego Piacentini, Amazon's Senior Vice President for International Consumer Business, said in a company statement in August that working in the FTZ will give Amazon more flexibility in logistics and payments due to preferential policies and the system of centralized declaration of batch imports and exports, which greatly facilitates customs clearance.

Commitment to reform

More foreign companies are stepping up investment in the Shanghai FTZ, said Zhu Min, Deputy Director of the Shanghai FTZ administration. In the first half of this year, 1,016 foreign-funded projects worth $5.4 billion were launched in the FTZ.

Then in July this year, the FTZ released a new negative list, revoking more barriers to overseas investment and stimulating further foreign interest.

The new list is more in line with international standards, showing greater transparency. It has only 139 forbidden or restricted areas for investment in the 28-square-km zone. Restrictions on foreign investment in manufacturing, commercial services and shipping services have been significantly eased. The negative list in 2013, in comparison, had 190 clauses. It had been introduced when the pilot FTZ was launched as a significant innovation. However, it was criticized for having too many restrictions and a lack of transparency. The further liberalization of areas in the negative list is an indication of Shanghai's determination to deepen reforms.

The city of over 20 million people is already the world's largest container port city and a major transportation hub. The Central Government has groomed Shanghai as a global financial, trade, shipping and logistics center, so it's no surprise that the FTZ was first established there. With the city being a magnet for foreign investment, exploring new ways to improve the management of the growing number of enterprises in the FTZ is one of the priorities for its regulators.

"Building a system to prevent illicit competition, setting up an integrity management system to facilitate authorization and streamlining supervision to cut operational costs for enterprises are among the priorities for the regulator," said Xu Mingqi, an economist at the Shanghai Academy of Social Sciences.

With administrative red tape shortened, enterprises outside the negative list can get their business licenses in four days, while outbound investment projects can be registered in five days, substantially facilitating cross-border investment. By the end of June this year, after the FTZ replaced the older approval system with a registration system for business affairs, it had attracted 10,445 enterprises, including 1,245 foreign-funded companies.

Still, financial regulations could be improved upon. "Most foreign companies wanting to do business in the Shanghai FTZ are service-based, especially financial institutions, yet there were not too many changes in these areas," pointed out Chen Bo, a professor at Shanghai University of Finance and Economics.

Room for improvement

Sun Lijian, a professor of economics at Fudan University, agreed with Chen, noting that financial regulation in the Shanghai FTZ lags behind investment management reforms. This could lead to arbitrage activities and pose a risk to the overall operation. However, Sun expects the restrictions for 2015 will be further eased.

With a more transparent and open investment management system, slashed logistics costs and deepening government management reforms, foreign trade volumes in the FTZ totaled 436.6 billion yuan ($72.8 billion) from January to July this year, rising 9.6 percent over the same period last year, data from Shanghai Customs showed.

China's customs regulator expanded the simplified clearance procedures initiated by the Shanghai FTZ to 51 special economic zones along the Yangtze River in August. Since September 3, the procedures have been applied to special economic zones across the country, and from September 18, to areas beyond these zones.

The FTZ will unveil more reproducible and transferable reform measures in the future, according to Zhang Wansheng, Director of Processing Trade and Bonded Supervision Division at China's General Administration of Customs.

Based on trials carried out in the Shanghai FTZ, the Ministry of Commerce is considering cutting administrative approval requirements for foreign investments nationwide as part of the efforts to improve the foreign investment environment.

Some of the FTZ's experiments have already been replicated. For example, a subscription registration system has been put in place throughout the country since March 1 to stimulate the enthusiasm of startups. In addition, China's central bank has liberalized interest rates for smaller foreign currency deposits for Shanghai since June 27 after a four-month trial in the zone.

With its first anniversary completed this September, the Shanghai FTZ is being looked up to for innovation as well as valuable lessons for deepening reform.

Zhu Min, Deputy Director of the FTZ administration, said the mandate is that the experience should be reproducible and transferable. The regulations and reform measures must also be compatible with the central government directives. Yet, there should be no blind copying. Where and when to set up another FTZ and how to test favorable policies will depend on whether they are viable and replicable, as the 28-square-km zone is more of a test bed for China's further reform and opening up, he added.

Du Yuchuan, General Manager of Company Registration Service at the Comprehensive Service Center of the Shanghai FTZ, added more to the FTZ's mandate. "An FTZ should not be a place for merely favorable policies such as tax cuts. It should be a test for facilitated customs clearance and the RMB's internationalization," he said.

Zhang Youwen, Director of the Institute of World Economy at the Shanghai Academy of Social Sciences, said that while a new FTZ can easily replicate the customs experience in its first year of operation, the difficulties mainly lie in the areas of finance and business credit. "That involves more administrative details, and requires time and patience," Zhang explained. CA

The Shanghai FTZ

» A free trade zone is a place where goods can be imported, manufactured and exported without the intervention of customs authorities.

»The China (Shanghai) Pilot Free Trade Zone comprises four areas under the special administration of Customs - Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Free Trade Zone. The zone, sprawling over 28.78 square km, provides world-class transport and communications facilities and a tax-free environment for domestic and foreign enterprises as a major hub of their supply chains in Asia.

» It marks a milestone in the nation's commitment to forge ahead with domestic reforms and open wider to world markets, in line with global economic trends. The priorities are to explore new routes and systems for China's opening-up policies, accelerate the transformation of government functions, promote economic restructuring and prioritize development steps to ensure effective and stable growth. The zone also aims to pioneer innovative ideas that can be replicated in other parts of the country.

» The Shanghai FTZ will set up eight international trading platforms by next year, focusing on oil, gas, iron ore, cotton, liquid chemicals, silver, bulk commodities and nonferrous metal transactions.

Shanghai FTZ Timeline

» 2003: Cheng Siwei, former Vice Chairman of the Standing Committee of the National People's Congress, says it is time for China to set up a free trade zone on the basis of existing bonded zones.

» 2005: Cities including Shanghai, Shenzhen and Tianjin apply to the State Council to establish a free trade zone on the basis of a bonded area.

» 2010: The National Development and Reform Commission under the State Council sends an inspection group to Shanghai.

» June 28, 2013: The Shanghai Municipal Government applies for a free trade zone after soliciting opinions from major central government departments.

» July 3, 2013: The State Council approves the plan and decides to build the pilot zone in Shanghai.

» September 29, 2013: Shanghai FTZ is inaugurated.

Q&A on FTZ

What is a bonded zone?

It is a special trade zone created within domestic areas. It has special arrangements for customs duties, import/export duties and several supervision approaches. For example, foreign goods can enter the region without paying duties and be kept bonded. The manufacturing and trade inside the zone can be exempt from value-added and sales taxes.

When was the first bonded zone set up on the Chinese mainland?

The Waigaoqiao Free Trade Zone, established in Shanghai in 1990, is the first bonded zone on the Chinese mainland. In 2012, the zone completed a fixed investment of 2.536 billion yuan ($420 million), while its total fixed assets were valued at 43.8 billion yuan ($7.3 billion). The zone has roads totaling 67 km in length, public greenbelts covering 350,000 square meters, and construction areas of 8.25 million square meters.

What are the tasks of the Shanghai FTZ?

- Accelerate the transformation of government functions;

- Further open up investment sectors;

- Push forward transformation-for-trade-development approaches;

- Deepen the opening up of the financial service sector; and

- Improve the legal system.

What is the difference between an FTZ and a free trade area (FTA)?

An FTZ is an area set up in a single country or region where goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of customs authorities. The aim is to lower international trade cost and boost export and international investment.

A free trade area is a trade bloc whose member countries have signed a free trade agreement, eliminating tariffs, import quotas and preferences on most (if not all) goods and services traded between them. It is a win-win trade policy for all parties involved.

(Source: http://www.china-shftz.gov.cn/Homepage.aspx)

 

 

 

 

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