China turns cautious over Shanghai free-trade port on concerns it might be too free

Chinese authorities have turned cautious over the expansion of Shanghai’s free-trade zone into a free port along Hong Kong lines, concerned that unfettered flows of goods and money could pose a risk to financial stability.

According to two sources familiar with the government’s thinking, state authorities and the Shanghai municipality have yet to decide on the size and location for the free-trade port – an upgraded version of the free-trade zone that was launched in late 2012.

Officials are still giving priority to safety and stability in reviewing the two proposals for the port, the sources said. One of the concerns is that monitoring mechanisms may not be adequate to ensure that goods and money stay inside the port area and do not flow outside it without being subject to duties.

“Officials are still worried about risks as they believe large commodity and fund flows at the initial stage would be difficult to control,” one of the sources said. “Some of the funds and commodities may flow out of the zone [without approval or tariffs].”

Shanghai began to draw up plans for the free-trade port last year and submitted the two proposals to the State Council for review and approval earlier this year. Senior government officials have previously said the port would be a fully open market in line with international standards and on a par with Hong Kong and Singapore.

The port would technically be an “offshore territory” slated for reforms on a trial basis. Products manufactured inside the zone would be tariff-free, but customs would levy a tariff if the finished products were sold to clients outside the area.

Go with the flow – China to develop Shanghai’s free-trade zone and port at ‘orderly pace’

Shanghai Securities News reported last week that Lingang New City, a 300 sq km area that connects to Yangshan port – a container terminal just south of Shanghai, would be earmarked for the development of the port, but the sources said the other proposal was to combine part of the Zhoushan Islands in Zhejiang province with Yangshan port.

A free-trade port should have a large geographical size for manufacturing, commercial and warehousing purposes, said Chen Bo, a professor at the Huazhong University of Science and Technology and adviser to local governments including Shanghai’s.

“The Yangshan deep water port, which covers a total area of about 2 sq km, appears to be too small for a free-trade port,” he said.

In Shanghai’s existing 120 sq km free-trade zone, tariffs are still imposed by customs authorities and cross-border money flows under the capital account are closely monitored and subject to regulatory approval.

The Industrial and Commercial Bank of China said in a research report last week that the free-trade zone in Shanghai lagged far behind Hong Kong and Singapore in terms of trade and investment facilitation, openness of the financial market and preferential taxation policies.

In late January, Shanghai mayor Ying Yong said the city was to build the free-trade port under the direction of the central government, but did not reveal any further details.

Separate guidelines for operating a free-trade port are expected to be endorsed by the State Council after the annual session of the National People’s Congress, which ends on Tuesday.