China Opens New Trade Zone in Shanghai, Reform Plans Unveiled

China opens new trade zone in Shanghai, reform plans unveiled

Reuters–2 hours 4 minutes ago

SHANGHAI (Reuters) - China opened a new free trade zone in Shanghai on Sunday in what has been hailed as potentially the boldest reform move in decades, and gave fresh details on plans to liberalize regulations governing finance, investment and trade in the zone.

The Shanghai FTZ, which covers an area of nearly 29 sq km on the eastern outskirts of the commercial hub, was approved by China's State Council, or cabinet, in July.

State-run Xinhua news agency quoted Commerce Minister Gao Hucheng as saying that the creation of the FTZ was a crucial decision for China's next wave of reform and opening-up.

"It follows the tendency of global economic developments and reflects a more active strategy of opening-up," Gao said at the launch ceremony.

The State Council said on Friday it would open up its largely sheltered services sector to foreign competition in the zone and use it as a test bed for bold financial reforms, including a convertible yuan and liberalized interest rates.

Economists consider both areas key levers for restructuring the world's second-largest economy and putting it on a more sustainable growth path.

Some Chinese and foreign firms have already moved to set up subsidiaries in the zone. A total of 25 companies so far have been approved to set up operations in a variety of sectors, alongside 11 financial institutions, most of which are domestic banks but including the mainland subsidiaries of Citibank and DBS.

Ralph Haupter, corporate vice president of Microsoft Corp, speaking on the sidelines of the opening ceremony, said Microsoft was excited about the zone's potential.

"Details and sizes of business are hard to predict at this stage. But business is continuously growing and the entertainment business is very important for us at Microsoft."

HIGH HOPES, OR NOT?

Some have trumpeted the FTZ, which integrates three existing zones, as comparable to Deng Xiaoping's creation of a similar zone in Shenzhen in 1978. Many credited that move as being crucial to China's economy opening up to foreign trade and investment.

Optimism among mainland investors that the zone will at very least attract fresh investment and engender a wave of fresh infrastructure spending has sent property prices and FTZ-related stocks soaring in recent weeks.

Skeptics, however, point to a similar scheme launched near Shenzhen, in Qianhai, last year, but that has so far failed to live up to expectations. Qianhai was presented as place for radical experimentation with China's capital account.

Analysts and economists say that the plans for Shanghai, at least, are more specific and ambitious.

For example, one major planned change officials described on Sunday will be in the regulations governing how foreign and Chinese individuals can invest across borders.

Previously foreign and Chinese investors were only allowed to invest across the border by buying into funds regulated through either the Qualified Foreign Institutional Investor (QFII) program or the Qualified Domestic Institutional Investor (QDII) program, both of which are restricted by quotas.

But Dai Haibo, deputy director of the zone administrative committee, said on Sunday that this requirement would be waived for foreign and Chinese individuals within the zone, who will be allowed to invest funds directly for the first time. He did not say whether they would also be subject to a quota.

He also said that foreign banks in the zone would be allowed to issue bonds in the domestic market.

Officials also said that China would develop an international oil futures trading platform in the zone and encourage foreign participation, part of attempts to upgrade commodities markets and hedge risk in the world's largest energy consumer.

The insurance regulator added on Sunday that it would support allowing foreign health insurance providers to operate in the zone and would also back the development of yuan-denominated cross-border reinsurance, among other reforms.

REGULATORY REQUIREMENTS FOR FOREIGN BANKS

Regulations of Chinese and foreign banks will also be eased, said Liao Min, head of the Shanghai branch of the China Banking Regulatory Commission (CBRC), adding the CBRC will adjust loan-to-deposit ratios and other regulatory requirements for banks in the zone.

He said that the government would consider easing regulatory requirements for foreign banks when they apply to upgrade representative offices to full-fledged branches in the zone, and it would accelerate the application process for foreign banks applying for yuan settlement licenses.

Both functions are key for foreign banks seeking to do business in China, and the slow pace of approval has been a subject of frequent complaints from foreign bankers.

Given the mixed history of other capital account reform projects and the current speculative environment, regulators have been signaling caution in recent weeks.

For example, while the project is widely considered to be a pet program of Premier Li Keqiang, Li did not attend the opening ceremony, nor did the heads of the central bank or the foreign exchange regulator. The highest ranking official from the central government was Commerce Minister Gao.

State media have run commentaries warning against undue property speculation, and have said that the most dramatic reforms were unlikely to be enacted this year.

"All reforms to interest rate and exchange rate systems will be based on the premise of risk control," Zhang Xin, head of the Shanghai branch of the People's Bank of China, told a press conference on Sunday.

There is also significant skepticism that Beijing will be able to implement profound financial adjustments within the zone without letting them spill out into the rest of the country, and numerous high profile academics and officials have argued publicly against implementing them in this way.

In addition, there have been reports of bureaucratic turf wars over which agency will drive financial reform. The zone proposes to test new policy environments for 18 different industries, ordinarily regulated by different bureaucracies, some with overlapping mandates and conflicting agendas.

Liao Qun, China chief economist at Citic Bank International, said the tone of the master planning document remains cautious given the challenges.

"Liberalization may not be realized all at once."

NYT

Experimental Free-Trade Zone Opened in Shanghai

By DAVID BARBOZA

Published: September 29, 2013

SHANGHAI — China opened a new type of free-trade zone here on Sunday in a bid to test financial changes that the government said could eventually spread to other parts of the country.

The new zone, which has the backing of the State Council, the Chinese cabinet, was first announced last July. It is expected to allow banks and other businesses within its boundaries to experiment in areas that are tightly controlled in China, including loosening regulation of interest rates and full convertibility of nation’s currency, the renminbi.

By opening the new test zone in Shanghai, a city of 20 million and one of the country’s major financial centers, the government appears to be signaling its determination to ease restrictions on investment while also trying to press ahead with plans to open up its financial system and internationalize its currency, analysts say.

The government has not yet given a detailed outline of how the pilot zone — which covers 29 square kilometers, or about 11 square miles, of ports and logistics areas — is expected to operate. But on Friday, the State Council said foreign and private companies would soon be allowed to invest freely in banks, shipping ventures, travel agencies and health and medical insurers that are set up in the experimental zone.

Restrictions are also being lifted on foreign investment in some telecommunications services and on the production and sale of video game consoles.

The creation of a free-trade zone in Shanghai comes as China’s new leaders try to grapple with how to restructure a fast-growing economy that favors state-run enterprises and restricts foreign investment and the free flow of capital.

The value of real estate in the area near the experimental zone has shot up in recent months, along with the share prices of publicly listed companies operating in or around the zone. But the leaders of multinational corporations have been pressing the government for more details, and it remains unclear how it will interact with other parts of China.

“There’s a lot of interest, but few people know the details yet,” said Stephen Green, a Hong Kong-based economist at Standard Chartered Bank.

But Yao Wei, a Hong Kong-based economist at Société Générale, said in a report this week that the signs were encouraging, and that creating the zone was reminiscent of the bold experiments China made in the previous decades.

“The overarching theme of all the reform in the 1980s and 1990s was, simply put, liberalization,” Ms. Yao wrote. “Local experiments in strategically important cities not only served as policy signals of reform commitment but provided guidance as to the path of upcoming changes.”

Editorial

Reform With Chinese Characteristics

By THE EDITORIAL BOARD

Published: September 28, 2013

The Chinese government says it will start an unusual experiment this weekend that could be the first step in long-awaited reforms of its financial system. On Sunday, the country will establish an 11-square-mile free-trade zone in Shanghai where foreigners will reportedly find it easier to set up businesses; investors will be able to move capital into and out of the country with few restrictions; and banks, not the government, will set the interest rates on deposits.

Some analysts see the Shanghai free-trade area as a modern-day version of the special economic zones created by Deng Xiaoping in the early 1980s to create islands of private enterprise in a Communist country largely isolated from the global economy. Optimists believe that just as that earlier venture eventually led to the broader opening of the Chinese economy, the Shanghai experiment, which is being pushed by Prime Minister Li Keqiang, will serve as a proving ground for financial reforms that have been resisted by hard-liners in the Communist Party.

There is no question that China needs to overhaul its heavily regulated and inefficient financial system, which shortchanges savers and private businesses while propping up bloated state-owned enterprises. Those distortions have helped foster the growth of a crisis-prone so-called shadow banking system, which raises money from individuals and lends it to private businesses.

Senior Chinese officials have frequently spoken about the need for financial reforms, including easing restrictions on foreign companies. “We will explore new ways to open China to the outside world, and Shanghai’s pilot free-trade zone is a case in point,” Mr. Li wrote earlier this month in The Financial Times.

Whether the Shanghai zone will lead the way to broader changes depends on how much the government relaxes its control. Economists also question if China, or any country for that matter, can effectively regulate the flow of money between the zone and the rest of the country.

Officials released a statement on Friday that provided a broad outline of what will be allowed in the zone, such as freer trading in the Chinese currency, the renminbi, but included few details and did little to clarify contradictory media reports. Last week, The South China Morning Post, a Hong Kong-based newspaper, reported that people working in the zone would have access to Web sites like Facebook and Twitter that are currently blocked in the rest of the country. But another report in The People’s Daily, the Chinese government paper, denied that the government would allow access to those sites in the free-trade area.

Chinese officials often introduce reforms incrementally to make them politically palatable and give businesses and government agencies time to adjust. Mr. Deng’s special economic zones started in the southern province of Guangdong but eventually expanded to other regions. To gauge the success of the Shanghai free-trade zone, keep an eye on whether others pop up elsewhere in China.

The Shanghai Free-Trade Zone

A damp squib

Sep 30th 2013, 16:46 by V.V.V. | SHANGHAI

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FOR weeks now, pundits and politicians have been talking excitedly about the coming Shanghai Free Trade Zone (SFTZ). Li Keqiang, China’s prime minister, has personally championed this initiative, which he has indicated will kickstart his new government’s broader plans to liberalise China’s economy.

Li Ka-shing, a Hong Kong tycoon who is Asia’s richest man, claimed that the SFTZ could propel Shanghai past Hong Kong to become the country’s chief financial centre. Punters gobbled up shares of any Chinese firms with the word “Shanghai” in their name (absurdly including underwear makers) confident that the zone would boost their fortunes. Netizens were positively aflutter when rumours surfaced that the Great Firewall, which blocks access to the unfettered internet, would be suspended in the promised land.

The wait is over. Chinese authorities have at last launched the SFTZ formally, and issued a set of guidelines. They continue to insist that this is a landmark event, on par with the creation of the Shenzhen special economic zone over three decades ago—a breakthrough that helped usher in liberal economic reforms and three decades of spectacular growth. At a press event held in Shanghai on September 29th, officials used the word "innovation" 43 times as they gushed about how this experiment would help China. The new government wants to transform the economy from the sweatshop to the world into a global innovation powerhouse.

So is the SFTZ really the next Shenzen? It is too early to tell, not least because Chinese reformers have a habit of starting slowly out of the gate, but the signs thus far are unpromising.

Boosters make three arguments. First, they say the demonstration effect of this pilot zone will stiffen the spine of liberalisers and silence the enemies of reform, making it easier for President Xi Jinping and Mr Li to propose bold reforms affecting the entire economy at important party gatherings in November. Second, they argue that initiatives pioneered in this zone will spill over into the broader economy, thus also speeding liberalisation. Third, they point to the many areas of the economy to be liberalised as reasons to cheer. According to officials, financial services, shipping, professional services and other service-sector areas will be opened up to private investment—including foreign investment—though precise details have yet to emerge to back up such claims.