Talks with US on investment treaty boost outlook for China's free-trade zones

Faltering free-trade zones could gain new lease of life as testing grounds for two-way investment deal between the world's two biggest economies

PUBLISHED : Sunday, 04 October, 2015, 11:19pm
UPDATED : Monday, 05 October, 2015, 3:03am

A deal might not yet be imminent but when and if one comes it could be just what China needs to realise its ambitions for its hyped, yet lumbering, free-trade zones.

China and the United States have agreed to speed up work on a bilateral investment treaty (BIT) that would lay out how and where companies could invest in the other's country.

China's four free-trade zones - in Shanghai, Guangdong, Tianjin and Fujian province - are expected to be testing grounds for such a treaty before it is implemented nationwide. If that happens, it would breathe life into zones that have had little interest from foreign investors.

READ MORE: Chinese to invest abroad in free-trade zone trial

The recent summit between presidents Xi Jinping and Barack Obama boosted treaty talks as business leaders lobbied for closer economic ties between the countries.

At the time of the talks, Shen Xiaoming, the Communist Party secretary of Pudong and chief of the Shanghai FTZ, said 49 financial liberalisations, including the Qualified Domestic Individual Investor scheme that allows mainlanders to directly invest in overseas equities, were likely to be implemented in the zone before the end of the year.

"One of the original ideas behind the free-trade zones was to make them a testing ground for the [treaty] and lay the groundwork for a nationwide roll-out once the treaty was signed," said Professor Zhao Xiaolei, head of the FTZ research institute at Shanghai University of Finance and Economics. "Progress in the treaty talks would have a substantial impact on the development of the zones."

A treaty would help both countries - US investors are eager for a bigger share of China's markets while mainland companies are looking offshore for business.

An analyst at a Shanghai government think tank said the zones would not go far without an official bilateral treaty.

But he added that the Shanghai free-trade zone could still go ahead and scrap a clutch of restrictions on foreign investment with a brand new negative list, which stipulates which sectors are off limits to overseas players.

"Local officials had anticipated progress on the treaty," he said. "They wouldn't openly admit it, but they did expect it."

Beijing allowed Shanghai to launch the mainland's first free-trade zone in late 2013.

Then earlier this year, the central government gave the city the go-ahead to quadruple the zone's area to 121 sq km to include the Lujiazui finance and trade area. At the same time, it endorsed the creation of three other similar zones.

Free-trade zones are open to investors from around the globe unless a business category is specified on the negative list.

As of the end of August, only 19 per cent of the 26,111 newly registered firms in the Shanghai zone were foreign-funded, the lack of overseas enthusiasm in part due to the exclusion of foreign players from the areas of most interest to them - finance and technology.

On top of that is the lack of a clear plan to make the yuan fully convertible and a detailed regulatory framework for free cross-border capital inflows, shortcomings that are undermining Shanghai's attempts to use the FTZ to speed its transformation into a global financial centre.

"Foreign investors can't afford to waste too much time accessing the mainland's finance sector," said Xu Mingqi, a researcher at the Shanghai Academy of Social Sciences.

Foreign investors can't afford to waste too much time accessing the mainland's finance sector
Xu Mingqi

But Zhu Dan, a deputy chairman at Zhangjiang Platform Economy Research Institute and a board member of the European Chamber of Commerce in Shanghai, said foreign businesses needed to gain a better understanding of Chinese market conditions, rather than just complain of limited access.

"Rarely have we seen foreign investors try to take advantage of the FTZs to help Chinese firms [expand abroad]," Zhu said. "Partnering with mainland companies to explore overseas markets is also a big opportunity."

Chinese firms appear keen to explore options abroad. In 2014, Chinese corporate investors sealed 405 outbound investment deals, worth a total US$77 billion, according to Bain & Company. "A depreciating Chinese yuan and other uncertainties in the global economy won't deter mainland firms from expanding abroad," Bain partner Kiki Yang said.

Chen Xiao, chief executive of Shanghai Yacheng Culture, said investors had opportunities.

"Keeping in mind that the FTZs are a testing ground for economic reforms in China, it's advisable for investors to use them as a springboard for two-way cross-border investments," Chen said. "It's time for businesses to carefully look at the FTZs for growth opportunities, both at home and abroad."