Column: Shanghai FTZ is the new Shenzhen

Written by Amitendu Palit | Updated: Oct 25 2013, 08:26am hrs
More than three decades after Deng Xiaoping launched the Shenzhen SEZ for connecting China to the brave new world of global trade, China has launched the Shanghai Free Trade Zone (FTZ). This might well mark Chinas foray into the new global turf of business and commercemany parts of which still remain unconquered by China.

As the Shanghai FTZ was unveiled with great fanfare and in large presence of multinational investors, the historical comparison with Shenzhen was inescapable. In 1980, when Shenzhen was born, China was struggling to discover ways of connecting to world trade. It decided on SEZs for doing so. Allowing export-oriented foreign investment to enter unhindered into a country where capital and profit were dirty words till a couple of years ago, was a radical and remarkable move. With systems and institutions still geared to serve the stateand only the statein their full capacities, Shenzhen was to be the window through which non-state capital and entrepreneurship was to come in. It was intended to be the testing lab for what would be modern Chinas most critical economic experiment. If doomed, Shenzhen was to be shunned; if not, it was to become history, as it did.

Shenzhen was the first step in Chinas becoming the worlds topmost traders in goods. It was also the biggest success among all SEZs that China experimented with. What worked in Shenzhen to perfection did not work as well in the other zones that China set up, particularly Hainan. Several factors contributed to the standalone success of Shenzhen, the most important being proximity to Hong Kong. Shenzhens biggest success was in transforming the Pearl river delta into one of the biggest factories in the world, producing all varieties of cheap good, ranging from toothpastes to transistors. It also pushed the industrial momentum upward along the coast and made Chinas entire eastern region a hub of cheap export-oriented production.

The Shanghai FTZ obviously has a different mandate. It is attempting to open up most of what is still closed in China. And in trying to do so, it is again going to serve as the testing lab, as Shenzhen did.

As Dai Haibo, the deputy secretary of the Shanghai Municipal Government and vice-director of the FTZ mentioned at the zones launch, the key function of the FTZ will be to enable the transition of the governments role in business to supervisory from administrative. What this implies is enterprises located in the FTZ will not require government approval for several issues that they do now including registering companies.

Procedural simplification is not only the virtue of the FTZ. In what might be interpreted as a radical change in Chinas policy towards trade in services, foreign investors in services that are not subjected to specific restrictions will be treated as equivalent to nationals. They will be allowed to register online cutting down the registration period to four days from the current 29.

In another significant measure, a negative list has been announced for services that can come up in the FTZ. China has always backed off from a negative list approach in negotiating services. Such an approach implies market access commitments on part of the host country in all services except those that are specifically mentioned in annexes to the list. China, like India, has been in favour of a positive list approach, where countries list only those sectors where they offer market access.

And finally, in what is indeed a path-breaking move for financial services in China, full convertibility of the yuan in the capital account and its cross-border use will be permitted in the zone. The zone would also allow free pricing of financial assets and securities.

While all these are indeed remarkable announcements given that China has been excessively cautious in opening its heavily regulated financial services sector, doubts are being cast over whether processes and transactions will really be as free as they are being made out to be. The capital convertibility of the yuan, for example, appears to be a rather grey promise. Much of the scepticism in this regard is on account of the pre-condition of risks being controlled for doing so.

Doubts are also being cast over how much of the new measures China actually wants to limit within the zone and how much does it want to leak out. Assuming that the larger game-plan behind building the FTZ is to encourage the institutions in the country to slowly adopt the liberal practices being tried out in the zone, implicit pushes and nudges towards such diffusion cannot be ruled out. All these, however, will continue to remain speculations since, in true Chinese style, much has been left unstated in the policy outline of the FTZ.

Speculations apart, the Shanghai FTZ is Chinas latest attempt to restructure its economy for enmeshing its policies and institutions more closely with global services. Clearly, China has its sights set on making its niche in global services tradethe domain where it is still probably more marginal than it wants to be.

The author is head (partnership & programme) and senior research fellow with the Institute of South Asian Studies in the National University of Singapore. Views are personal