EU chamber tells China to walk the talk on liberalising markets to boost FDI, cement Shanghai as global financial hub

Shanghai has to reduce taxes and red tape, make the yuan fully convertible and broaden market access to draw more investment, says chamber leader
European companies have a ‘heightened sense that precaution is necessary in the face of uncertainty’, Shanghai chapter chairman says

Banking & finance

Daniel Renin Shanghai

Published: 9:30pm, 27 Sep 2023

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A key European business group in China is urging mainland authorities to renew their efforts to turn Shanghai into a global financial hub to increase the flow of foreign direct investment (FDI) into the troubled economy.

Shanghai has to cut red tape, reduce tax rates, make the yuan fully convertible and broaden market access for foreign companies to attract businesses, talent and capital, said Jens Ewert, a board member of the Shanghai chapter of the European Union Chamber of Commerce, adding that liberalisation over the past two decades has not lived up to expectations.

“I think it is still very far away from that,” Ewert told a conference in Shanghai on Wednesday. “There are structural issues around the currency and access to the market, which are still not fixed in 20 years.”

It is important for mainland authorities to walk the talk now and take a substantial step forward in luring foreign funds and talent.

Visitors watch a robot welding an auto body during the 23rd China International Industry Fair (CIIF) in Shanghai on September 19, 2023. Photo: Xinhua

The proposal to transform Shanghai into an established international financial centre echoes the city’s ramped up efforts to attract FDI after China reopened following the end of its strict Covid-19 pandemic curbs early this year.

The mainland’s commercial capital drew US$12.8 billion of FDI in the first half of 2023, up 7.1 per cent on year. However, that growth was the result of a low base in the year-ago period, when Shanghai experienced a two-month citywide lockdown to contain the coronavirus between April and May 2022.

Local authorities have extended a broad olive branch to global companies since the reopening, inviting them to invest in the city, which has traditionally been seen as a gateway for foreign capital and businesses to enter the mainland market.

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Carlo Diego D’Andrea, chairman of the chamber’s Shanghai chapter, said a widely anticipated release of pent-up consumer demand did not take place after China’s reopening.

“There is a heightened sense that precaution is necessary in the face of uncertainty,” he told the conference, adding that the troubled property market and Beijing’s tightened legal frameworks to strengthen national security are deterring European businesses from making investments in China.

In July, a report by the European chamber showed that 33 per cent of its members had Asia-Pacific headquarters in Shanghai, down from 40 per cent in 2022 and a sign that the mainland’s most developed metropolis may have lost its lustre as an investment magnet.

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Beijing has long aimed to build Shanghai into a global financial hub on par with New York, London and Hong Kong, formally setting 2020 as a goal in 2008. But a study by the European chamber at the end of 2019 found that almost nine out of 10 members felt Shanghai’s banking and finance market was too regulated compared to other international financial centres, hindering their growth in mainland China.

The chamber is also lobbying Beijing to extend tax exemptions on a range of employee benefits such as housing and children’s education to enhance China’s attractiveness to overseas businesses and professionals.

At the end of 2018, China announced that tax breaks for certain expatriate allowances would be phased out by the beginning of 2022. Under pressure from multinational companies, the government made a last-minute decision in late 2021 to extend the exemptions for two more years.

It is estimated that a foreign company would have to pay an extra 800,000 yuan (US$109,419) in taxes for a foreign employee with two children if the exemptions were scrapped.