The success of special trade zone established in Shenzhen in the late 1900s has given the public much expectation to the Shanghai Free Trade Zone (SFTZ) in 2013. After almost three years from that time, this innovation seems to have little inspiration for the trade partners given the firm control of the authorities and rigid regulations. The free trade zone, from my perspective, has not set business free at all.
SFTZ is located on a
small area on the rural and coastal side of Shanghai. Right from the start, the “negative list” that includes the items foreigners cannot invest in the zone released restrained investors, because instead of a short list of just banning guns, drugs and pornography there were over 1,000 banned sectors. In the end, there were only six sectors opened for business in the zone, including financial, shipping, commercial, professional, cultural and social areas. The first area is the one that the official wanted to pay most attention to. Financial reforms promised to free the currency convertibility and interest rates, in order to promote Chinese currency. However, bankers said they could not find any difference in-and-out of the zone.
However, SFTZ is not without its merits. The zone has cut red tape especially for customs, logistics, shipping and professional services such as education and law. For example, the customs clearing process has been expedited from three to four weeks to several days, which encourages imports. In addition, there were 37 service industries and 17 manufacturing industries permitted in the zone but not elsewhere in China. But these benefits are more visible for small businesses; such as seafood importers that made the local people line up to buy cheap lobsters.
Nevertheless, “there were around three quarters of respondents in a survey believed the free-trade zone offered no tangible benefits for their business.” “Around half said they hadn’t noticed any change for their business since the zone opened in September 2013.” (WSJ) The slowing down of China’s economy and unfavored policies discouraged foreign companies. Also, the obvious laterality towards local firms put foreign investors in a disadvantaged position. SFTZ seems more like a hype that the authority used to attract foreign investors but without much success.
What is more interesting is that nobody really understands about the exact rules, even lawyers. The investors still are willing to open their stores in the zone, having the belief that it is better than nothing. They expect that the benefits could be materialized one day. The unpredictability concerns the investors.
The Free Trade Zone suggests the government’s determination on market liberation. The financial reform is correspondent to recent political movements such as anti-corruption. However, the pilot projects should be sped up since capital control policy will become less and less effective along with the increase of wealth of the public. The government has to regulate the financial sector properly or the accumulated wealth could not be capitalized effectively. At first place, the ambition was to catch up Hong Kong and become the inland financial hub. However, it has fallen far short on a lot of aspects especially legal regulation. Financial investors put more emphasis on risks, which makes them still prefer Hong Kong to Shanghai after the opening of FTZ. There has been no obvious protection and deregulation needed to lure major financial firms to expand their business so far. The failure is originated from the foundational political concerns that make the government is reluctant to free the market.
Lastly, the policies listed that “enterprises engaged in manufacturing business in the FTZ enjoy 15% income tax rate” and for every tax free policy there is a word “may” connected explicitly shows that the Free Trade Zone is never free.