Li Keqiang

Legal loopholes prompt China to delay Shanghai free-trade zone rules

The central government had planned to unveil the rules late last month, but policymakers put the lawyers back to work out of concern the legal framework needed tightening

PUBLISHED : Monday, 05 August, 2013, 12:00am
UPDATED : Thursday, 05 September, 2013, 7:25am

Beijing has delayed the announcement of new rules for its planned free-trade zone in Shanghai as government lawyers attempt to close potential legal loopholes.

The central government had planned to unveil the rules late last month, but policymakers put the lawyers back to work out of concern the legal framework needed tightening, to reduce the risk of legal disputes involving foreign investors, government sources familiar with the matter said.

The ambitious plan for Shanghai is known to have been opposed by some financial regulators, prompting speculation among some sources that the cited legal concerns may be a pretext for some regulators to try to retain their grip on the financial sector.

"Now we have met with the so-called 'legal loopholes' and I don't know if these are just excuses for some regulators to keep their tight control over China's financial industry," a government source said.

The proposed set of rules could contain as many as 21 initiatives to attract foreign investment, covering sectors as diverse as financial services to commodities trading and culture-based businesses.

Senior officials in Beijing, after consulting government legal experts, realised some of the rules drafted for the free-trade zone were not in line with current mainland financial regulations and relevant laws, one of the sources said.

"Among the 21 points [of new policy initiatives], some now look very tricky. If you announce them and soon begin to implement those new initiatives, there will be a risk that someday the government may be in trouble if a dispute happens between a foreign investor and its Chinese partner," the source said.

"It could get even worse if they eventually choose to meet in court and then the government will be in a dilemma over whether we should obey existing national laws or obey those new local rules just for the Shanghai free-trade zone."

The Shanghai free-trade zone is expected to be a testing ground for major policy reforms. Details of the plan, which was officially announced at the start of last month, remain unclear.

It emerged that the lead-up to the announcement of the free trade zone was marked by an unusual degree of behind-the-scenes division at the highest levels of government and policymaking agencies.

While the Shanghai plan won strong support from Premier Li Keqiang, he had to stare down opposition from financial industry regulators, including the China Banking Regulatory Commission and China Securities Regulatory Commission.

Senior regulators disagreed with Li's plan to open Shanghai's financial services sector to foreign investors, the sources said, adding that the policymaking process had been "extremely difficult since the very beginning".

Three sources with first-hand knowledge of high-level government said Li lost his temper at one point during a cabinet session. When told of the continuing opposition to his plans for Shanghai, Li slammed his fist on the table in frustration, the South China Morning Post reported on July 15.

"It seems Premier Li's job is not easy at all. He met with strong opposition from the financial regulators. He fought back and insisted that China urgently needed the Shanghai free-trade zone as part of his efforts to restructure the economy," said the government source of the latest obstacle in the form of the legal concerns.