Exploration and Practice in the Shanghai FTZ

By+HU+JIANGYUN

CHINA （Shanghai） Pilot Free Trade Zone （FTZ） officially opened on September 29， 2013， having gained State Council approval on August 22. The new 28.78 sq km zone encompasses four bonded trade zones – Waigaoqiao FTZ， Waigaoqiao Bonded Logistics Park， Yangshan Free Trade Port Area， and Pudong Airport Comprehensive FTZ – in Shanghais Pudong New Area. The zones international standards promote investment and trade， unfettered currency exchange， efficient and fast regulation， and a normative legal environment. In the year since Shanghai FTZ opened its exploration and practice have generated new ideas and a fresh path towards deepening Chinas reforms and opening wider to the world at large.

Trade Facilitation and Liberalization

An FTZ （Free Trade Zone） is a special trading area within a country or region where customs formalities， such as quotas and tariffs， do not apply. The World Customs Organization Kyoto Convention defines an FTZ as an area within the contracting party wherein no tariffs are payable because it is deemed beyond the customs frontier. Shannon in Ireland， Batam in Indonesia， and Colon in Panama all have FTZ.

An FTA （Free Trade Area） is a theoretical concept of a trade bloc whose member countries have signed a freetrade agreement that eliminates tariffs， import quotas， and other trade restraints on most （if not all） goods and services traded between them. Each member country， meanwhile， maintains its respective foreign trade policy. The North American Free Trade Area （consisting of the U.S.， Canada and Mexico）， and the China-ASEAN Free Trade Area， are two examples.

In addition to propelling free trade and maximally reducing trade costs， the Shanghai FTZ， in promoting market mechanism， has given play to its decisive effect to guarantee healthy， stable and sustainable development of Chinas economy.

The zone operates according to the model： “enter the zone， then make a customs declaration，” so shortening clearance time to two or three days and saving around 10 percent of logistical costs. It moreover simplifies the process of goods circulation and enlarges their scope. The zones service mode consists of a zone management committee and administrative departments in charge of industry and commerce， tax， and quality supervision. The setting up of a foreign-funded enterprise， which entails obtaining archival filing certification， a business license， an enterprise code， and tax registration， previously took more than one month. The process now takes just four days. These measures have hence both facilitated and liberalized trade.endprint

Accelerate Institutional Improvement and Expand the Service Industry

It was back in the late 1980s that the Chinese government learned from advanced international experience how to set up an FTZ and so bring into effect the state policy of reform and opening-up. Owing to limited political reforms， however， the proposed FTZ was changed to a bonded zone. Since then， although China has made several modifications to the bonded zones management， there have been no breakthrough innovations to its system. The establishment of the Shanghai FTZ in 2013 accelerated reforms， showcasing the Chinese governments resolve to streamline administration and institute decentralization– the sole route to Chinas becoming a world power.

The Shanghai FTZ has hastened Chinas institutional improvements by publishing a negative list and bringing into effect national treatment， interest rate liberalization， and opening of the capital market. Meanwhile， it has spearheaded the opening up of the service industry， as apparent in the suspension or cancelation of 23 admittance restrictions （with respect to investors qualifications， share proportion and business scope） on 18 service industries， including finance， shipping， commerce， trade， and culture. Among these 23 measures， 16 have been implemented. Of these， three involving games consoles， performance brokerage and entertainment venues need adjustment. Four require clearer definition of management methods， or more detailed regulations with regards to international transportation management， international ship management， limited bank license certification， and legal service.

The negative list is an innovative management approach on the part of developed countries whereby the government specifies the fields of investment that are not open to investors. This institutional advance constitutes a transformation of government functions which embod-ies the governments macro-management capability and highlights government confidence and credit. Shanghai FTZ has included 190 special management measures on its negative list. This bold move towards institutional improvement promotes deepened reform and opening-up， as well as sound socio-economic development.

A profound reform measure， national treatment is generally enjoyed solely upon gaining market access， as observable in WTO goods and service trade agreements. Such national treatment， however， is not comprehensive， and as yet there is no unified international investment convention. High-level bilateral or regional investment agreements define comprehensive national treatment as that an investor enjoys both before and after market access. The institutional improvements Shanghai FTZ has made to comprehensive national treatment have benefited investors and hence greatly improved the investment climate， so promoting sound development of Chinas investment market. This has laid the necessary foundations for China to work out a high-level investment agreement and sign an FTA with major economies， and so participate in global governance.endprint

The Peoples Bank of China （PBC） supports the zones institutional building of interest rate liberalization and capital market openness. Last year， PBC published its Opinions on Financial Measures to Support the China（Shanghai） Pilot Free Trade Zone， proposing 30 detailed rules and regulations with respect to the zones financial reform. It included institutional innovations in major fields to facilitate exchange for investment and financing， promoting RMB cross-border transactions， advancing market-based interest rate reform， and deepening foreign exchange administration reform. In May 2014， PBC Shanghai Head Office released the Implementing Rules of the China （Shanghai） Pilot Free Trade Zone for Separate Accounting Business （for Trial Implementation） and the Rules of the China （Shanghai） Pilot Free Trade Zone for the Prudential Management of Risks Relating to Separate Accounting Business （for Trial Implementation）. This has promoted development of the zones financial industry.

Proper Handling of Short-term Effect and Long-term Construction

Constant improvements are necessary for the construction of the zones various systems and measures. Authorized by the National Peoples Congress， the State Council in December 2013 decided to make temporary adjustments to a dozen administrative regulations and approvals in the field of investments， and to eight service industry administrative regulations and approvals. More than 10 ministries， including the Ministry of Finance and the Ministry of Transport， have since promulgated relevant documents to support the zones construction.

Nevertheless， there are several noteworthy issues to address on the FTZ. First， its emphasis should be placed not on preferential policies， but rather on effective institutional improvements. The obvious profit potential of FTZs has made many localities eager to build them. Prices of factors such as FTZ-related real estate have risen sharply， so greatly reducing the development space for manufacturing and service industries. Second， the zones pace of reform and opening-up needs to be stepped up and to extend beyond the immediate vicinity， so giving full play to the spirit of entrepreneurship and innovation. Emphasis on short-term achievements is inadvisable； it should rather be on a system that fits the China Model and that is applicable nationwide. Third， society as a whole should be more positive， encouraging， and supportive of FTZ construction. Appropriate handling of the relationship between short-term effect and long-term construction， and completing the strategic layout， development planning， and institutional assessment of FTZs in China is imperative. FTZ construction throughout the world is not， after all， accomplished in one action， but through a specific process.endprint