China’s not-so-free trade zones lock foreign investors out of key industries

PUBLISHED : Wednesday, 28 September, 2016, 4:12pm
UPDATED : Thursday, 29 September, 2016, 10:33am

China plans to introduce seven more pilot free trade zones (FTZs), including five located in inland provinces, but foreign investors are urging the central government to expand the currently restricted market access and remove uncertainties brought about by a national security review of foreign investments.

Commerce Minister Gao Hucheng told state media on August 31 that the new FTZs would be in northeast China’s Liaoning province, east China’s Zhejiang province, west China’s Shaanxi and Sichuan provinces, the city of Chongqing, Hubei, and central China’s Henan province. It is the first time that inland regions have been included in the list of FTZs.

Gao said the FTZs, larger in area and covering a wider range of industries, would have their own characteristics and help deepen economic reforms.

Wang Haifeng, director of the International Economy Division under the National Development and Reform Commission (NDRC), China’s top economy planner, said the new FTZs were selected by the central government according to “implicit standards”.

“The selected regions are with relatively big economies of scale, and have unique strengths in transport or economic patterns, and their location and features should be in accordance with national strategies like the belt and road initiative,” Wang said.

Shaanxi, Sichuan and Chongqing, being located in west China, could form a cluster to take up the manufacturing capacity that has moved out of China’s eastern provinces, Wang said. Hubei and

The definitions included in this document are so extensive, in both wording and scope, that they amount to a massive national security overreach
European Chamber of Commerce

Henan are both transport hubs, Zhejiang has the strongest private economy driven by innovation industries, while Liaoning is the only province in northeast China with a sea port, he added.

The size and scope of the new FTZs and specific policies to facilitate their development have yet to be announced. On September 3, the Ministry of Commerce issued a set of draft rules regulating foreign investment in China, whereby the registration process for foreign investment would be simplified and a revised “negative list” would be rolled out nationwide from October 1, identifying industries that are closed to overseas investors.

The negative list was introduced in late 2013 after the mainland’s first FTZ was opened in Shanghai, and was revised in 2014 and 2015. In the revised version applicable to the existing four FTZs including Shanghai, Guangdong, Fujian and Tianjin, online gaming operations, petroleum stations and property development are open to foreign investors.

The latest negative list, introduced by the state council in April 2015 and set to roll out October 1, includes 15 industries that are completely or partially off limits to foreign investors, including financial services, mining, telecommunications, online news service, medical services, culture and entertainment.

In a written reply to questions from the South China Morning Post, the European Chamber of Commerce said its 20-16 Business Confidence Survey shows that China’s pilot FTZs “have not lived up to their full potential”, highlighting the fact that financial services was one of the banned sectors that was of greatest interest among its members.

Chinese authorities claim they have trimmed the negative list two times and that the version introduced in April last year includes 122 categories closed to foreign investors, down from 190 categories in the 2014 list.

But the European Chamber pointed out that rather than genuine trimming, “it is apparent that many industries and sectors have merely been re-grouped” in the negative list.

For example, in the 2014 version, under the “business service” sector, it listed some general restrictions on foreign law firms, auditing and accounting firms and foreign research institutions. However, in the 2015 version these three business categories have been grouped under the “leasing and business service” section with more detailed restrictions applying, according to the chamber.

The European Chamber also highlighted another concern brought about by uncertainties from a “national security review” undertaken by the State Council starting in April last year, which includes “overly-broad and vague definitions of what constitutes ‘national security’”.

“At present, the definitions included in this document are so extensive, in both wording and scope, that they amount to a massive national security overreach. Such vagueness creates a great deal of uncertainty for business, as it implicitly leaves the Chinese Government with the option of undermining foreign market access based on unclear and broad national security considerations,” the European Chamber said.

“An overwhelming majority of [members] have not yet established a presence in any of China’s FTZs. This clearly indicates that there is a very limited interest in participating in the Chinese authorities’ long-held preference for gradual reforms,” the chamber said.

“The European Chamber appreciates the present reduction of items on the negative list. However, in order to induce the structural shift towards consumption that the Chinese economy needs, the negative list needs to be further reduced in scope and speedily rolled-out nationwide.”

Wang said when the seven new FTZs are launched, more industry areas will be opened up for foreign investors, pushing the reforms one step further than what is allowed in the nationwide roll-out of the current negative list.

“But some key sectors, including financial services and telecommunications, may see a slower reform pace, mainly due to vested interests,” he said, adding that these sectors are currently dominated by state-owned companies which have long been occupied by big players.