Yangtze Briefing

Time running out for Shanghai's free-trade zone

Seven months after scheme announced, few businesses see good reason to hang out their shingle in the 'Hong Kong of the Yangtze'

PUBLISHED : Saturday, 03 May, 2014, 4:08am
UPDATED : Saturday, 03 May, 2014, 4:08am

As more details of regulations for Shanghai's free-trade zone trickle out, it is clear that the business community, local government officials and ordinary residents have less and less reason to celebrate.

The draft rules contain nothing concrete, and it is becoming obvious the local legislature is powerless to introduce anticipated reforms and Hong Kong-style trade liberalisation in the zone.

It was widely expected that Shanghai would draw up specific rules governing the development of the FTZ, providing a commercial legal framework on par with international standards.

But now the Shanghai People's Congress admits the regulations will fall short of the public's expectations.

In late September, when the State Council chose Shanghai as the site of the mainland's first FTZ, the rule of law was a primary concern for potential local and overseas investors.

Foreign firms shied away from what was supposed to be the mainland's testing ground for reforms amid worries that the contracts they signed wouldn't be protected by mainland law. The municipal government, in an apparent effort to assuage such fears, announced it would draw up specific rules to make the zone more investor-friendly.

Such promises proved to be empty, as even Shanghai - the mainland's commercial hub - had to acknowledge that Beijing was the central authority for making rules and policies.

According to local media, legislators who wrote the draft rules admitted they dared not contravene the ministries and state regulators in Beijing.

Indeed, after seven months of operation, the absence of clear-cut policy direction in the zone has largely dented investors' confidence in conducting cross-border business freely. For example, Beijing promised to make the yuan convertible under the capital account in the 29-square-kilometre zone, but has yet to unveil long-awaited guidelines. Not surprisingly, foreign investors have reacted coolly to the idea of a free port modelled on Hong Kong that did not enjoy a free capital account.

At the end of March, only 6 per cent of businesses registered in the zone were foreign-funded.

Nonetheless, Shanghai tried to lure more investors to the zone, with local authorities promising to simplify approval procedures for business registrations and licences.

The FTZ provided a one-stop service centre for investors, and even promised to grant licences in seven working days.

But, again, it failed to live up its promise, and now complaints are growing about lengthy application procedures and strict review processes.

At least 10 executives with domestic and foreign companies based in Shanghai and other mainland cities told the South China Morning Post they saw no special reason to establish a subsidiary in the FTZ.

Another problem is that no tax incentives have been implemented in the FTZ.

Premier Li Keqiang envisioned the Shanghai FTZ to be not just a showcase of China's economic might, but an experimental base for its further integration into the global economy. The State Council gave the Shanghai zone three years to gain experience that could be applied to other parts of the country.

Now, time is against Shanghai as a dozen rival FTZs are in the pipeline, including one in the Pearl River Delta.

The mainland's most economically developed city has been struggling to chase a new growth engine since the downturn in exports after the global financial crisis of 2008.

Hopes were high that services would fill much of the void left by manufacturing. The FTZ was expected to deliver a much-needed boost to Shanghai as it competed against domestic rivals to attract financial and human capital.

Shanghai Mayor Yang Xiong continued to stress the significance of developing the FTZ, and the municipality gave it top priority.

Instead, city leaders now appear to be battered by fears that upcoming rival FTZs will steal Shanghai's thunder.

Early this year, Beijing gave preliminary approval for 12 new FTZs around the nation, including the one in the Pearl River Delta.

It is expected to be launched soon, with Beijing granting more preferential policies for Hong Kong and Macau to accelerate the province's further opening up.

While it is too early to write off Shanghai's FTZ, whatever advantage it might have enjoyed as the first-to-the-gate is likely to be overshadowed by its rivals.