While the Chinese government’s move to liberalise a host of service sectors in the new Shanghai Free Trade Zone (FTZ) has been a draw for investors, the government’s history of slow and incremental reform means foreign investors remain cautious and, in the near term, investment in the FTZ will still largely come from local enterprises, the consultancy firm Nexia TS China stated in a recent statement. Although more than 6000 new companies have been registered in the Shanghai FTZ since it was formally opened in September 2013, only 400 of these investments came from foreign companies, and Nexia TS China reported that foreign investors have adopted a 'wait and see' approach as the Chinese authorities implement further reforms which, when complete, will make Shanghai FTZ the most liberalised FTZ on mainland China.
The Shanghai FTZ, which was officially launched on September 29, 2013 with the backing of the Chinese premier, Li Keqiang, is expected to act as a testing ground for a number of the government's new economic reforms, modelled on the Shenzhen special economic zone framework.
Developed as part of China’s wider efforts seek a “more proactive involvement in the global economy,” according to the China Pilot Free Trade Zone Administration, the FTZ will integrate four existing zones: the Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone. The new FTZ which covers an area of 29 square kilometres, will be a one-stop shop that streamlines and simplifies investment procedures in a range of new service sectors.
“Since China’s entry into the World Trade Organisation, there has been a significant improvement in the openness of the services sector,” said the China Pilot Free Trade Zone Administration in an official statement. “The Pilot Zone selected 23 specific industries in the areas of financial, shipping, commercial, professional, cultural and social services to promote more openness… The reform of China’s investment system is an important part of the deepening reforms of its administration system and administration management innovation.”
Managed by the Shanghai FTZ administration committee, the Shanghai FTZ has significantly liberalised China’s financial services sector to local and foreign investors, as third-party service providers in the FTZ will now be able to carry out crossborder transactions in the renminbi currency within the FTZ. Although further moves by the State Administration of Foreign Exchange (SAFE) to simplify current account and capital account settlements for local and foreign multinational companies, and the government’s decision to abolish SAFE approvals, which were previously required for outbound payments of guarantee fees by companies have significantly eased bureaucratic constraints, several foreign companies have been reluctant to commit new investments in the FTZ.
According to Nexia TS China, while domestic companies have welcomed the new FTZ, foreign investors are expected to wait and closely observe the outcomes of more sweeping reforms, including the potential move to reduce the number of restricted sectors in the Shanghai FTZ ‘negative list’, including FDI in natural and energy resources, which is still considered as a strategic sector by the government.