Opinion: Don't be too negative about the FTZ

January 16, 2014 | BY

clpstaff

Those who criticise the FTZ negative list as a sign that the zone has been overhyped are missing the point. It is still a big step from a government that is used to being in control

The launch and the publicity surrounding The China (Shanghai) Free Trade Pilot Zone (FTZ) gave rise to much excitement and expectations of reform in key areas such as foreign exchange control and the regulation of foreign investment. However, the initial euphoria has been largely replaced by a sense of cautious scepticism. Is it fair already, as many people have done, to write off the zone as a publicity stunt?

The General Plan for the Shanghai Free Trade Zone that was released alongside six sets of administrative measures at the zone's inauguration promised a series of reforms, including the introduction of a negative list concept. The list sets out those types of projects that are still subject to foreign investment pre-approval and those projects still subject to percentage caps on foreign investment. The issuance of the negative list was the first blow to expectations, as, with some minor exceptions, it merely set out those areas which were subject to restrictions in the existing and long-standing Foreign Investment Guidelines. Sceptics took this as a sign that the Shanghai government could not deliver because of central government opposition.

A first step

Understandably, businesspeople want to see concrete measures that lead to meaningful new opportunities. However, the significance of the change from an approval-based to a registration-based system cannot be overstated in a country which has always put a premium on the control of foreign investment. That such a change has been piloted at all is remarkable – it requires the adoption of an entirely different mindset on the part of government officials. As underlined by the inclusion of the Free Trade Zone in the 13th Plenum Party Document, the zone is now enshrined as a testing ground for the freeing up of the economy from official control. Following the pattern set up by the successful reforms piloted in the Special Economic Zones in the early 1980s, the whole nation could end up as an easier place to do business because of the FTZ.

The fact that the first version of the negative list contained little by way of substantial liberalisation was merely because it was rushed. Shanghai leaders chose to issue the first version of the list before they could negotiate and secure support for industry-specific liberalisation. Their justification – that they would issue further versions with progressive reforms – fell on disbelieving ears. But, recently, we have seen meaningful change to the negative list. Liberalisation in what are considered by many the toughest industry nuts to crack – the telecoms and IT industries – has been announced, with media reporting in early January that foreign investors would be allowed for the first time to take majority control over online data and transaction processing businesses, call centres, internet access, and multi-side voice and video communications services. All such businesses based in the FTZ, with the exception of the internet access businesses, will reportedly be able to offer services nationwide.

Financial reform

So what about the most ambitious of the zone's goals – financial reform? Major financial institutions such as HSBC and Citibank have already taken up residence in the zone in anticipation of such reforms. How long will they have to wait? Within a raft of mainly hortative measures by the People's Bank of China (PBOC) in an Opinion on December 2, pre-approval requirements were scrapped for companies in the zone to conduct cross-border settlement and exchange deals; qualified foreigners working in the zone can trade equities; and qualified residents in the zone can invest in the foreign securities market. These measures illustrate the trend towards allowing easier access to offshore finance, creating the conditions for companies to put in place cross-border regional treasury functions, and permitting domestic companies freely to invest overseas. However, the PBOC has deliberately refrained from committing to a specific timetable for rolling out the more exciting of the financial reforms such as the lifting of interest rate controls, the issuance of negotiable instruments of deposit, and more wide-ranging capital account liberalisation.

Which China specialist would ever have imagined securing a business licence for a wholly foreign-owned enterprise in just four days, with payment of minimal registered capital, in a time frame dictated purely by the company's documents of incorporation? The FTZ represents progress. There will be hiccups along the way as so much by way of negotiation is needed with a multiplicity of government departments for new reforms to be piloted. But the facts that the FTZ exists at all and that the reforms to date have been achieved represent enormous efforts over a very short period of time by a small number of determined reformers within the Chinese governmental and political infrastructure.

Peter Corne, Dorsey and Whitney, Shanghai

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