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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

HARBORING GOOD INTENTIONS: An aerial view of the Yangshan Free Trade Port Area, a part of the Shanghai FTZ, on October 29, 2013 (FAN JUN)

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. "We'd 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 China's 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, USP's 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 China's 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-square-km area in eastern Shanghai has already made profound achievements in liberalizing trade, boosting foreign investment, financial innovations and shifting the government's 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.


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 pre-establishment 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 list's 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 China's 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 Shanghai's bonded areas during the past two decades. Among the total, 1,677 companies, or 13.7 percent, are foreign-funded, 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.

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