THE FRONTLINE OF REFORM

By+Zhou+Xiaoyan

Hony Capital， founded in 2003， is a leading private equity firm in China. It mainly focuses on investment in advanced manufacturing， healthcare and service sectors both at home and abroad.

In the past， when Hony Capital would bid for overseas acquisition， it had to add a caveat in the bidding papers—if the acquisition failed to be approved by the Chinese Government， the deal would be terminated.

“With such requirements， we hardly stood a chance，” said Zhao Linghuan， CEO of Hony Capital. “Wed already lost before the first blow of the whistle.”

Things started to look up after Hony Capital registered in the China （Shanghai） Pilot Free Trade Zone （FTZ） in September 2013， when the FTZ was inaugurated in the eastern city as an experimental field for Chinas future reforms. Overseas investment from companies in the FTZ no longer requires government approval if it does not exceed a specified amount.

“Even since last September， Hony has made four overseas investments. Enjoying the conveniences afforded by an FTZ is something we have been dreaming of for a really long time，” said Zhao.

Such convenience also applies to foreign-funded companies in the one-year-old pilot zone.

“The time to deliver a medicine sample from our company headquarters in the United States to our lab in Shanghai has been halved. Previously， receiving approval took two weeks or more， but now it only takes three days. The overall cost has been lowered by 25 percent，” said Hu Jiangbin， General Manager for the Greater China region of the United States Pharmacopeial Convention （USP）.

By virtue of an increase in production efficiency and an expansion in its business scope， USPs business revenue in China surged from January to August this year， three times that of the same period last year.

The convenience and benefits of an FTZ have also reached ordinary Chinese consumers， as they now have better access to cheaper authentic foreign products.

Microsoft Corp.s Xbox One was launched in September by a joint venture between Microsoft and Chinas BesTV in the Shanghai FTZ， ending the 14-year ban on game consoles in China. Previously， Chinese consumers had to buy those consoles through unofficial channels at a higher price. Another example would be the opportunity to access all products available on Amazon through its Chinese website， pay in yuan， enjoy lower shipping charges and faster delivery for Chinese shoppers. The credit for this improvement goes to the pioneering Shanghai FTZ.

During the past year， the 28.78-squarekm area in eastern Shanghai has already made profound achievements in liberalizing trade， boosting foreign investment， financial innovations and shifting the governments role from authorization to supervision. Moreover， it serves as an experimental field for future reforms in a country where reform is the top priority.

“The Shanghai FTZ is aimed at institutional innovation. In Shanghai FTZ， there is no such thing as ‘the perfect tense for reform but only the continuous tense，” said Ai Baojun， Director of the FTZ Management Committee and Vice Mayor of Shanghai.

Achievements

As Ai puts it， the one-year-old pilot zone has made four major milestone achievements—creating an investment management system based on the negative list， engendering a more convenient trading environment， introducing a financial innovation system with the twin aims of yuan convertibility under the capital account and the opening up of financial services， and finally a transformation of government functions featuring during-establishment and post-establishment supervision instead of preestablishment approvals.

One of the biggest achievements of the FTZ is to make foreign investment in China easier by adopting the negative list.

A negative list is a management model for foreign investment that works by defining areas that are restricted for foreign investment. Foreign investments outside the lists scope do not require government approval and enjoy national treatment.

The negative list was derived from the United States. To date， over 70 countries have adopted this approach to managing foreign investment and it has become a new trend in investment rules globally.

Upon its inauguration in September last year， the Shanghai FTZ adopted the negative list for the first time in Chinas history， so as to increase openness and transparency in foreign investment management.

The 2014 version of the negative list of the Shanghai FTZ has been pared down to cover 139 areas， compared to 190 in 2013. Encouraged by this， foreign companies have flocked to the zone in large numbers.

As of September 15， there had been 12，266 businesses newly registered in the Shanghai FTZ during the past year， more than all the companies set up in Shanghais bonded areas during the past two decades. Among the total， 1，677 companies， or 13.7 percent， are foreignfunded， according to data from the Shanghai Municipal Government.

Wang Shouwen， Assistant Minister of Commerce， said a surge in foreign companies means the new system featuring a negative list has been recognized by the market.

As the negative list grows shorter， areas open to foreign investment are mounting.

A general plan governing the operation of the FTZ stipulates that 23 areas of the service industry should be opened up to foreign investment. To date， the policy contained in this document has been completely implemented and， as a result， 283 foreign investment projects have been carried out in the FTZ， according to data from the Shanghai Municipal Commission of Commerce.

Another breakthrough the Shanghai FTZ has made is loosening business registration requirements in order to fully tap entrepreneurship in China.

Since its inception， the Shanghai FTZ has initiated pilot reforms on business registration to encourage startups by lifting restrictions on minimum registered capital， payment deadlines， and the down payment and cash ratios for registered capital. This measure went on to be adopted nationwide on March 1 of this year and has been in effect ever since.

Over half of the newly established businesses in the FTZ are logistics and trade companies.

“In the first eight months of the year， their logistic costs have been reduced by 10 percent， with three to four days faster customs clearance，” said Ai.

Trade facilitation has been improved within the zone with innovative supervisory measures. Shanghai Customs and Shanghai Entry-Exit Inspection and Quarantine Bureau have introduced over 60 new measures to facilitate trade and improve supervision.

In terms of innovations in the financial sector， a total of 51 measures have been released by central authorities to support the FTZs development. At the end of August， 25 percent of the businesses newly registered in the FTZ were financial companies， including 87 financial institutions， 453 quasi-financial institutions， 296 financial information service providers， 2，179 investment and asset management companies.

The Shanghai International Energy Exchange was launched in the FTZ on November 22 last year. The Shanghai Gold Exchange launched an international board in the FTZ on September 18 this year to allow foreign investors to invest in Chinas gold market， in hopes that it might eventually challenge global gold markets like those in New York and London.

Only a start

Many of Shanghai FTZs reform measures have already been or will be introduced nationwide.

According to the Shanghai Municipal Government， a total of 21 reform measures in investment， trade and finance are being replicated nationwide， such as business registration and overseas investment within a certain amount being exempt from government approval. In addition， another 33 reform measures are being assessed and will be introduced nationwide subject to the results of the assessment.

For instance， Chinas customs regulator expanded the simplified clearance procedures initiated by the Shanghai FTZ to 51 customs along the Yangtze River in August. Since September， the procedures have been applied to customs across the country.

The national version of the negative list is being formulated by the Ministry of Commerce and the National Development and Reform Commission （NDRC）.

China and the United States are carrying out Bilateral Investment Treaty （BIT） talks and will start substantive negotiations on the negative list in 2015. BIT talks between the two countries began in 2008 and are expected to galvanize Sino-U.S. economic ties.

Experiments on the negative list in Shanghai will serve as an important point of reference for BIT talks between China and the United States， said Ai.

Hu Zucai， Vice Minister of the NDRC， said the negative-list approach and easier market access for foreign companies will be formalized and extended to suitable areas of China.

Chen Bo， Secretary General of the Research Institute on Free Trade Zone with the Shanghai University of Finance and Economics， said that in regard to the negative list， much has still to be rectified.

“The list is shorter than it was before but some shortcomings remain. Compared to developed countries， the list still covers too many areas and has ambiguous classifications and definitions. For instance， some guidelines are not detailed enough. Businesses are not fully aware of what they are allowed to do and what not，” said Chen.

Fu Weigang， Executive Director of the Shanghai-based SIFL Institute， said the biggest achievements of the Shanghai FTZ have lain in business registration reform and the negative list.

There are two reasons why these areas have produced the most prominent achievements. First， they are each administered by a single government department， making it easier to carry out reforms. For instance， business registration is governed by the State Administration for Industry and Commerce and managing foreign investment is the responsibility of the Ministry of Commerce. Second， these reform measures only involve procedural issues but dont in- volve any vested interests， said Fu.

“Thats to say， if a reform measure involves several government departments and vested interests， it will be much difficult for it to be carried out， as is evidenced by the slow progress in opening up and innovations in the financial sector in the FTZ，” said Fu.

After the inauguration of the pilot zone， many people have pinned hope on financial reforms in the zone， and some of them even think that reform represents its most important mission. But to date， there havent been any financial reform measures that have been able to make an impression. Its partly because one year is too short to expect any concrete results. More importantly， when it comes to financial reforms， there are a lot of communication and negotiation required between the multitudes of departments concerned，” Fu said.

Yao Weiqun， Research Officer of Shanghai WTO Affairs Consultation Center， said its a good thing that the Shanghai FTZ has a clear vision—aiming at institutional reforms instead of preferential policies.

“The current scope of opening up deserves to be praised. I think more can be expected from the opening up of the service sector，” said Yao.

“Right now， it has taken only the first of the approximately 1 million steps necessary to reach its goals. Its too early to overrate it，”Yao said.

Zhao， CEO of Hony Capital， expects the upper limit of overseas investment that can be exempt from government approval to be further increased by the Shanghai FTZ.

“The upper limit cant meet the demand of our overseas expansion， and it has become an obstacle for our companys future development，” said Zhao.