Operations at Shanghai’s free trade zone, announced on August 22, 2013 by China’s Ministry of Commerce as officially approved, are expected to kick off by the end of September. The pilot FTZ covers four special customs supervision zones, namely Shanghai Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Shanghai Pudong Airport Free Trade Zone, and has a total area of 28.78sqkm. Analysts believe that among several industries, those directly related to the FTZ such as trade, shipping, ports, logistics, construction, real estate and finance will benefit the most from the zone's establishment.
Shanghai is set to launch officially its pilot free trade zone, China’s first FTZ, end of September.
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The Shanghai FTZ is considered the latest masterpiece of “Keqiang Economics.” Premier Li Keqiang championed the FTZ, with Li overruling opposition from financial regulators to push the program’s passage. It was previously reported that several financial industry regulators objected to the FTZ, believing it would have a huge impact on the existing regulatory system.
Three laws on foreign-invested enterprises, China-foreign equity joint ventures and China-foreign contractual joint ventures, and the Law on Protection of Cultural Relics were suspended with the establishment of the FTZ.
Many analysts consider the Shanghai FTZ the starting point in China’s latest efforts to open up further its market to foreign investors after economic reforms in past years stalled due to several challenges.
Wary that they could lose their advantage, many of the interest groups that have emerged since China’s reform and opening up in 1978 are opposing the country’s efforts attract foreign investment. These groups are primarily in the finance, resources and public utilities sector where government influence and state capital dominate. This has blocked the entry of foreign and private capital, impacting not only further reform but also efficiency.
In addition, WTO dividend, which China has enjoyed since its accession in 2001, is waning. China has profited hugely thanks to the facilitation of trade in goods under the WTO framework. The country, however, is facing an increasingly challenging international economic environment with the growing drawbacks of the multilateral trading system. The rise of trade in services, and Europe’s and the US' hope to reshape the multilateral trading system and restore discourse power through TPP, TTIP negotiations after the financial crisis are compounding the situation.
Further, China's exports have been slowing since 2008 due to weak external demand, a strong yuan, and rising labor and raw material costs. Concerns over the development of many export enterprises, the livelihood of countless workers and growth of local GDPs are issues as well.
Many consider the Shanghai FTZ as the most straightforward way to revitalize overseas trade, particularly in China’s coastal areas. These hubs are heavily export-oriented and have, in recent years, seen a large number of companies failing and shutting down due to slowing business.
An FTZ essentially opens trade channels by giving up taxes. On the surface, the state's tax is reduced. As imports and exports increase, however, foreign trade enterprises recover, promoting economic development and greater consumption, resulting in a greater source of revenue.
By establishing the Shanghai FTZ, China is extending an “olive branch” to foreign investors, thereby staying ahead of competition. This is key, with a turnaround in exports expected soon as the US economy recovers and Europe moves out of a recession. Aside from exporters, established companies, start-up finance and logistics enterprises will benefit from the FTZ.
With Shanghai’s FTZ getting approval, Shenzhen and other coastal areas in China are looking to follow in the city’s footsteps by applying for similarly relaxed policies toward foreign investment to convert their existing bonded zones into FTZs.
The pilot FTZ’s success will extend through the coastal area, boosting the economy. This in turn will spur the development of environmental protection, information, finance, culture and media, consequently spurring information and cultural consumption, environmental governance, financial reform, interest rate liberalization and yuan internationalization.
This article was originally published in Chinese on Chief Executive China.