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Shanghai FTZ: From 'Bold Experiment' to National Model

A new round of reform and opening-up of China marked by the opening of the China (Shanghai) Pilot Free Trade Zone two years ago is sure to be carried on in the country's 13th Five-Year Plan (2016-20).

More importance will be attached to opening-up in the new Five-Year Plan which is to be released soon. Prominent on the agenda is the expansion of free trade zone groups in China.

Zhang Jianping, director of the international economic co-operation institute for international research under the National Development and Reform Commission, said that many provinces have submitted their applications of free trade zones to promote a new round of reform and opening-up locally. A large number of these applicants are quite qualified, he said.

Qualified candidates include internationally influential cities along the Yangtze River Economic Belt such as Wuhan and Chongqing, as well as bigger-size cities in border provinces, such as Urumqi, which can serve as inland ports for free trade, said Zhang.

Besides, progress has been made concerning a deepened financial reform in the Shanghai FTZ. Premier Li Keqiang said during an executive meeting of the State Council on Oct 21 that the renminbi convertibility would be increased step by step. In addition, steps to expand the functions of existing free trade accounts, foster more overseas investment by qualified domestic individual investors, expand the back-flow channels of overseas renminbi investment and support the legal establishment of overseas equity investment funds would also be considered.

All these improvements are based on the steady steps that the Shanghai FTZ has made.

This April, its original size of 28.78 square kilometers was expanded to include a wider area of the city's flagship economic and commercial hub, Pudong New Area. And another three FTZs have been created based on its model in Guangdong and Fujian provinces and in Tianjin municipality.

The central government has always bet firmly on Shanghai FTZ being such a pioneer project.

President Xi Jinping told the annual sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference in March this year that, "the Shanghai FTZ was a bold experiment" when it was launched.

"But it overcame its difficulties to become a blueprint for other sites, exploring new paths for China to build a more open economic system".

Many lessons were learnt in the creation of the Shanghai FTZ. And as a result, many of its methods and systems have been employed in the other three zones.

In February, for instance, the Ministry of Commerce gave the green light to a parallel car import scheme for 17 dealers, including eight from Shanghai and nine from other provinces.

Chinese consumers normally buy cars from dealers authorised by auto makers. The prices of imported cars are often much higher in China than in other countries.

But cars sold under the parallel import scheme were at least 10 per cent cheaper than those in 4S shops, according to auto dealers.

The scheme is being offered in the other three FTZs as well as cities including Shenzhen, Suzhou of Jiangsu province and Hefei of Anhui province.

A ban on imported game consoles, including those produced by market leaders Microsoft's Xbox and Sony's PlayStation, imposed in 2000, meanwhile, was also lifted first in the Shanghai FTZ, in 2014.

Shanghai also piloted the widely praised "negative list" approach for foreign investment and preferential trade and financial policies. Its original 190-item list has been shortened to 139 items that are not yet open, or remain restricted, to foreign investment.

A nationwide version was introduced earlier this year in all the four FTZs, with only 122 items on their lists.

By the end of August, the Shanghai FTZ had attracted 4,891 newly registered foreign-invested companies, with total investment worth $73.16 billion. Foreign-invested companies with investments worth more than 10 million yuan (S$2.2 million) had reached 1,291.

The amount of outbound investment made by Chinese companies in the Shanghai FTZ, meanwhile, reached $18.4 billion, within its first two years.

Shen Xiaoming, director of the management committee at the Shanghai FTZ, considers those two years as witnessing the most active outbound investment activity the Pudong area has seen in its 25-year development.

Its initial one-month approval process is now three working days-another system adopted nationwide in other zones.

A survey last month by the American Chamber of Commerce in Shanghai showed 42 per cent of 99 US firms established in the zone plan to expand into the other three sites.

They praised new policies introduced by Shanghai Customs, allowing goods to be declared with the authorities soon after they have entered the area. Average time needed for imported goods entering the FTZ has been shortened to just half a working day from the previous 2-3 days, meaning logistics costs have been cut by 10 per cent.

Progress within the Shanghai area's financial sector has also attracted particular attention.

By July, 28 financial institutions had been connected to the zone's separate accounting unit system. A total 22,726 new free trade accounts worth 892.5 billion yuan had been registered and were being used, with the total value of cross-border renminbi settlement reaching 732.3 billion yuan. There were 186 companies using renminbi two-way cash pooling operations, with a total worth of 223.4 billion yuan. And more than 70 multinational companies had participated in the zone's pilot centralized operation for foreign exchange fund transfer.

Experts are looking forward to more progress in the financial sector. "The aim of the Shanghai FTZ is financial liberalization, and it cannot be done within a geographically-based special economic zone," Zanny Minton Beddoes, economics editor of The Economist magazine in Washington, recently said.


August 2013: State Council gives green light for China (Shanghai) Pilot Free Trade Zone.
September 18, 2013: State Council unveils the framework plan for the Shanghai FTZ.
September 29, 2013: Shanghai FTZ launched.
April 27, 2014: Area of the Shanghai FTZ expanded to 120.72 square kilometers.
March 24, 2015: Politburo approves the framework plans for FTZs in Guangdong, Fujian and Tianjin.
July 24, 2015: Shanghai FTZ submits financial reform plan including 49 policies to the State Council.
August 28, 2015: Ministry of Commerce releases 26 guidelines to foster innovation in FTZs.
October 15, 2015: National Development and Reform Commission officials indicate that key cities on the Yangtze River Economic Belt such as Wuhan and Chongqing could be the next FTZ candidates.

What they say

"It is not the Shanghai FTZ's mission to stand out from its peers, but rather to strive to excel with its own merits."

Shen Xiaoming, director of the management committee at the Shanghai FTZ

"In the first place, the Shanghai FTZ should realise a high degree of openness to foreign investment by having a global vision, being more open and with predictable policies, an international investment system, a highly reliable government, as well as provide more benefits to employees of domestic companies and create a better commercial environment."

Sun Yuanxin, deputy director of Research Institute for the Shanghai FTZ at Shanghai University of Finance and Economics

"The Shanghai FTZ has created a more efficient business environment for enterprises. But more can be expected, especially in taxation reforms."

Li Zhaojie, deputy director of the administrative committee at the Shanghai FTZ

"The key to further development of the Shanghai FTZ lies in financial reform. As the total area of the Shanghai FTZ is quite limited, it is hard to attract a large number of high-end manufacturing firms. The city's strength in financial services should be the core of the Shanghai FTZ in the future."

Yu Nanping, a professor at the School of Advanced International and Area Studies under East China Normal University

"We have seen limited income tax incentives (e.g. reduced income tax rates) introduced for the Shanghai FTZ in the past two years."

Vivian Jiang, national leader of tax and business advisory services at Deloitte China

"Tianjin is working hard to build a foreign-funded manufacturing highland in China."

Jiang Guangjian, deputy director of the administrative committee of the China (Tianjin) Pilot Free Trade Zone

"Being a mainland region that is close to Taiwan geographically, Pingtan will play a significant role in cross-Straits relations."
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