Shanghai Free-Trade Zone struggles through birth

Despite the hype, Mayor Yang Xiong not finding it easy to deliver on promise setting up a global financial and shipping hub to rival HK

PUBLISHED : Saturday, 09 November, 2013, 4:48am
UPDATED : Saturday, 09 November, 2013, 6:01am

Shanghai Mayor Yang Xiong has been busy talking up the advantages his city can offer multinational companies as he seeks to build momentum for its free-trade zone. But delivering on pledges of creating an environment that facilitates investment smoothly may not be easy.

Yang told a clutch of top foreign company bosses at the end of last month that Shanghai was pushing ahead with steps to create a more investor-friendly environment, in line with the city's ambition of transforming itself into a global financial and shipping centre.

The city's newly launched free-trade zone, seen as a test bed for further economic reforms, is expected to add to the lustre of the metropolis already generally known as a key gateway for foreign investors to the world's most populous country.

However, it remains to be seen how far the city can succeed in removing stubborn hurdles, including red tape and rising costs, to make it easier for multinationals to set up operations.

Mainland policies on market liberalisations and reforms remain the domain of the State Council and the central government ministries. Many of Shanghai's efforts to attract foreign capital and talent do not get anywhere without a nod from Beijing.

This was illustrated when the city sought to cut the personal income tax. Residents who earn about 100,000 yuan a month pay about 30 per cent income tax, nearly double the rate in Hong Kong. But state tax authorities killed Shanghai's plan.

Yang's massive project faces other problems, including a capital exodus. An increasing number of domestic and foreign manufacturers are shifting their production facilities elsewhere on the mainland to escape the city's high land and labour costs.

The much-hyped free-trade zone has yet to whet the appetite of overseas investors. Detailed guidelines on what types of businesses will be allowed to operate in the zone are still being worked out.

Indeed, Shanghai is facing resistance from ministries that strongly oppose bold steps towards liberalisation, even though reform-minded Premier Li Keqiang has said he is determined to see the zone help the mainland integrate more deeply with the global economy.

Wang Xinkui , a key adviser to the municipal government, told a seminar recently that one proposed move - free capital flows between the zone and the rest of the mainland - was a daydream. Deposit rates for the yuan are higher than for other currencies and the government wants to avoid an influx of hot money.

Beijing has said the yuan will be fully convertible in the zone, but only when conditions allow.

The draft operating guidelines have been revised more than 20 times at the request of ministry-level regulators, who cited inadequacies in the preparatory work done by the Shanghai government, according to one local official involved.

As for Yang, he must be keen to prove his worth as the right choice to lead the city given the controversy that surrounded his appointment.

Yang was not made a member of the Communist Party's Central Committee during the leadership reshuffle late last year, which left him technically ineligible for the post of Shanghai mayor.

There was speculation that his close relationship with former president Jiang Zemin , whose base of power is in Shanghai, played a key role in securing the position for Yang.

Still, there are opportunities for Yang to leave a legacy of which he can be proud.

He could do well to learn from the experiences of former vice-premier Huang Ju and former Shanghai mayor Xu Kuangdi , who led the city from 1995 to 2002.

Huang and Xu faced similar problems to those confronting Yang, and took the trouble to meticulously study plans for megaprojects such as the Yangshan deep-water port before submitting them to the central government.

The hard work paid off. Local officials said the plans were convincing and detailed enough to receive the go-ahead from the leadership, and carrying out the plans proved easy after Shanghai received the green light.

In Yang's favour is that fact President Xi Jinping and Li are Shanghai supporters.

Xi served a brief stint as Shanghai party secretary in 2007, before being elevated to the Politburo's Standing Committee that year.

Yang and his team must ensure their proposals are carefully thought-out, and won't hit obstacles straight out of the gate. With Xi and Li as judges, Shanghai has a shot at turning lofty ambitions into reality.