By expanding the FTZs to inland and less-developed provinces, where the level of local governance has lagged behind the prosperous coastal region, it could propel the deepening of regulatory reform in these regions, thus providing new sources for growth.
On August 31, 2016, China’s central government approved the establishment of seven new free trade zones (FTZs) in the regions of Chongqing, Zhejiang, Hubei, Henan, Sichuan, Shaanxi and Liaoning, bringing China’s total number of FTZs to 11. It is notable that five of the new FTZs will be set up in inland provinces. All four existing FTZs are located in coastal regions.
The extended FTZ initiative can be seen from two perspectives. Internationally, by choosing to announce the expansion just days prior to the G20 summit held in Hangzhou from September 4-5, the initiative was an integral part of China’s efforts to push forward regional integration and a more liberal approach to international trade. By establishing FTZs in inland and western provinces, the initiative will help to promote China’s One Belt, One Road economic initiative that runs along the ancient Silk Road.
Domestically, an FTZ expansion also advances the structural reforms that China’s leadership has been vigorously promoting in recent years. Unlike China’s special economic zones, which rely on tax incentives and subsidies to attract investment, the FTZs adopt a “negative list” approach to motivate investors, meaning foreign investors can venture into any sector as long as it is not explicitly prohibited.
About 5,000 foreign-funded businesses were registered in the four existing FTZs in the first half of 2016. By expanding the FTZs to inland and less-developed provinces, where the level of local governance has lagged behind the prosperous coastal regions, it could propel the deepening of regulatory reform in these regions, thus providing new sources for growth.
Chinese Commerce Minister Gao Hucheng told the Xinhua News Agency that the decision to expand the FTZs shows China’s “strong resolution [toward] advancing reforms and opening up.”
Diversifying FTZs’ locations may also magnify the initiative’s “experimental” effect. According to the authorities, each FTZ is tasked with encouraging innovative institutional design in a specific area. For example, the Shanghai FTZ focuses on financial reform and internationalizing the Chinese yuan. The FTZ in Zhejiang is expected to stimulate the liberalization of bulk commodity trading. According to Xinhua reports, the new FTZs that are to be established in Henan and Shaanxi provinces will focus on promoting the One Belt, One Road initiative and linking China’s vast inland region to the outside world.
By starting up FTZs in more diverse regions and with more diverse conditions, the initiative may further promote innovation and generate experiences that can be applied on a larger scale.
The FTZ initiative will be a key instrument in the coming years as the Chinese endeavor to promote much-needed structural reform to safeguard the country’s long-term economic well-being.
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