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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Feature
UPDATED: October 13, 2014 NO. 42 OCTOBER 16, 2014
The Frontline of Reform
One year on from its establishment, how is Shanghai's free trade zone doing thus far?
By Zhou Xiaoyan

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 FTZ's 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 China's 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 FTZ's 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, China's 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 don't involve any vested interests, said Fu.

"That's 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 haven't been any financial reform measures that have been able to make an impression. It's 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 it's 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. It's 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 can't meet the demand of our overseas expansion, and it has become an obstacle for our company's future development," said Zhao.

Email us at: zhouxiaoyan@bjreview.com

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