Zonal defence

Clearer outlook? Shanghai’s FTZ

Is it full speed ahead for Shanghai’s free trade zone? After months of uncertainty about how the project is going to take shape, there’s been a flurry of activity in Pudong where the zone is located (see WiC202 for an introduction).

Last Friday there was news about the businesses that will be encouraged to operate there. Ownership restrictions have been suspended or reduced for foreign capital in industries as diverse as banking and shipping, travel agencies, entertainment companies and the makers of games consoles.

Two days later it was time for the formal opening of the project, which was unveiled by dignitaries under the unimaginative title of The China (Shanghai) Pilot Free Trade Zone.

The following day there was another major announcement, although this time the news had a little less get-up-and-go.

Instead the focus was on what wouldn’t be allowed in the FTZ, with the publication of a so-called “negative list” covering hundreds of items. Areas where foreign investment is forbidden include internet cafes, lotteries and news organisations. Restrictions will also apply in industries such as insurance, e-commerce and the manufacturing of batteries for alternative-energy cars.

Nonetheless, the domestic press saluted the announcement, echoing the official view that the launch is an initial step in what promises to be a game-changing journey. An editorial by Xinhua even urged Hong Kong not to feel threatened by developments, assuring the city that competition with Shanghai would lead to “a bigger business cake for all, not smaller crumbs”.

Truth be told, not many Hongkongers are suffering sleepless nights, turning up their noses at what they see as Shanghai’s shortage of comparable strengths and skill-sets. In fact, the speculation has been more about the level of support for the new enclave on the mainland, with the South China Morning Post reporting on a disappointing turnout at the launch event. Bigger-hitters were conspicuous by their absence, including Premier Li Keqiang, who is widely credited with pushing hardest for the zone’s creation. “Now the baby was born, but its father was not present,” mulled one of the newspaper’s columnists, wondering whether the no-shows reflected infighting over the project.

Certainly, some of the early hype surrounding the zone has turned out to be unfounded. Previous reports claimed that restrictions on banned websites such as Facebook and Twitter would be lifted. But the launch announcements were a disappointment, with the authorities stating that there would be no special rules for internet usage.

But what of the “negative list”?

The thinking is that it has a positive twist because anything not mentioned is going to be fair game for investment, rather than requiring further approvals on a case-by-case basis. Previously foreign investment permissions have been granted within broad categories (encouraged, allowed, restricted or banned) with foreign firms complaining that the rules are often implemented in an inconsistent or unclear manner.

In Shanghai the regulations look more straightforward – on paper, at least. “For all fields not on the negative list, an approval system for foreign investment projects is now replaced by a registration system,” the municipal government has advised.

About 25 companies have announced the start of operations, alongside 11 financial institutions, including the mainland subsidiaries of two foreign banks. More are likely to follow if the pilot project picks up pace.

A research piece on the zone from HSBC this week was also relatively bullish. Yes, the authorities are going to be cautious, the authors note. But Rome wasn’t built in a day and the FTZ has become a reality only six months after Li Keqiang’s promotion to premier.

The report also argues that the zone’s architects have three main objectives: encouraging foreign and private investment in China’s highly regulated services sector; speeding up financial reforms, including further moves towards market-based interest rates; and experimenting with more convertibility for the renminbi.

Expect the project to have “profound implications for China’s financial landscape and long-term growth outlook,” HSBC concludes.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.