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Li Xiaoyang, assistant professor of economics and finance at Cheung Kong Graduate School of Business

China pushes ahead with plans to woo international investors

Rollout of free trade zones paced by desire to cautiously implement changes

In Partnership WithQIANHAI INTERNATIONAL LIAISON SERVICES LIMITED

Pulling a page from the playbook of previous years, China has instituted a series of Free Trade Zones to boost international investments and to serve as a test bed for economic reforms. The 100-square-kilometre-plus zones in Fujian, Guangdong and Tianjin are modelled on Shanghai’s free trade zone, which debuted in 2013.

The Special Economic Zones of the past were designed “to encourage urbanisation and foreign direct investment, largely into sectors generating activity in China’s ballooning manufacturing sector”, says Peter Bullock, Pinsent Masons partner heading the firm’s technology practice in Asia-Pacific.

Today’s Free Trade Zones are geared towards liberalising the financial sector, boosting investment flows and encouraging the domestic services industry. The plan is to cut red tape, boost private consumption and buttress the services industries in order to put the Chinese economy on a sustainable growth path.

“Although the schedules of potential benefits are very wide ranging with ‘something for every sector’, the real impetus appears to be as part of the liberalisation of the yuan,”  Bullock says. That’s a view shared by Li Xiaoyang, assistant professor of economics and finance at Cheung Kong Graduate School of Business. These free trade zones share “a focus on capital accounts, they promote the internationalisation of the yuan and banking services, and they help make capital more mobile”, Li says.

The rollout of these free trade zones has been paced by the reality of China’s desire to cautiously implement changes in these trial balloons. “Initial delays with the announcement and implementation of the Shanghai FTZ processes rather blunted the attraction of the zone as a streamlined alternative to other zones or the remainder of Shanghai,” Bullock says.

One initially heralded change was a switch to a “negative list” system in which, unless investment in a category was specifically forbidden, that field or industry was deemed to be open for international firms. While the negative list is being winnowed, the impact will be muted to the extent that the “effective negative list turns out to be very similar to the old catalogue system, with predominantly all of the restrictions on telecoms and internet related business remaining intact”, Bullock says.

Peter Bullock, Pinsent Masons partner heading the firm’s technology practice in Asia-Pacific

The free-trade zones offer real benefits. “The physical infrastructure in these areas is robust, good roads and highways, and the customs clearing process is efficient,” Li notes. He says government officials in the zones have the latitude to offer sweeteners to companies via “labour incentives, land usage and tax benefits to attract foreign capital”.

Early movers have tended to be in the fiscal sectors, although interest may be spreading. “The main opportunities are for financial institutions, although one of my clients, in the creative industries space, has talked of taking advantage of the Shanghai FTZ,”   Bullock says. Electronic equipment producers and the manufacturers of computer products are participating, says Li, who sees chemical product companies and pharmaceutical firms benefiting.

The different zones seem to have different focal points. The first zone in Shanghai was geared to all of China, while “the newer zones have more geographic focus, with Fujian focused on Taiwan and Guangdong more on Hong Kong, Macau and Southeast Asia”, Li notes.

The free-trade zones are a work in progress. “They are taking baby steps,” says Li, who sees officials learning and adapting as the projects unfold.

Analysts expect the lessons and practices of the zones to filter into more Chinese markets. “It is anticipated that the Shanghai FTZ is going to be a template to be rolled out much more widely across other cities,” Bullock predicts.

Li echoes the sentiment. “From a historical point of view, China is good at setting up pilot examples and then letting other cities follow,”  he says. “I speculate there will be more FTZs in other areas in two to three years.”

One way in which the zones may evolve is to adopt an internationalised system of laws within them to create a playing field attractive to international firms. “The attraction of Qianhai is that it is investigating whether it could apply ‘international’ laws, in the same way as the Dubai International Financial Centre,” Bullock says. “The Hong Kong Law Society is reaching out to offer its support for this part of the initiative and, if issues of enforcement are addressed, this would likely be very attractive for foreign investors.”

As a part of the effort to internationalise the yuan, actions within the FTZs may be paired with activities occurring outside China, predicts Li. China can use “off-shore banking centres in London, Singapore or Canada to promote yuan internationalisation by encouraging Chinese companies to issue bonds and debts in bigger markets, perhaps issued in yuan denominations”.

The rate of growth in the international economy and the degree to which regional rivals up their game will impact the pace of change and the relevance of the free trade zones. “If the US economy were to boom and switch offshore production to, say, India, then this could accelerate liberalisations being experimented through zones such as the Shanghai FTZ,”  Bullock notes. “With the euro losing steam, it’s an important opportunity for the yuan to step up,” Li adds.

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