As Shanghai Free Trade Zone expands, how will it contribute to increasing innovation and liberalization?
n a fresh move seen as part of the country’s ongoing exploration to further open the economy, on August 6, China’s State Council, the executive body of the central government, announced the addition of the Lingang New Area to the existing China (Shanghai) Pilot Free Trade Zone (FTZ), doubling the size of the zone.
The ambitious blueprint, the Overall Plan of the New Area of Lingang in China (Shanghai) Free Trade Zone, looks to create a new area with a GDP output of one trillion yuan ($142.41b) by 2035, equal to the economic output of the current Pudong New Area.
The existing FTZ in Pudong totals 119 square kilometers, including areas such asNanhui New City, Lingang Equipment Industrial Zone, Xiaoyangshan Island and the area to the south of Pudong International Airport.
Although many details remain unannounced, the messages sent out by the document have created a stir among observers.
Compared with the previous expansion of the Shanghai FTZ back in 2015, the newly added area is not just seen as the FTZ’s geographical expansion, but also as a move to launch “version 4.0” of the Shanghai FTZ, six years after its initial inauguration.
While other areas under the Shanghai FTZ are aimed at creating free trade zone parks on par with high global standards, the Lingang New Area is focused on building a “special economic function area with high global market influence and competitiveness,” said Wang Shouwen, China’s vice minister of commerce.
Apart from this special positioning, first announced in early 2019 and detailed in the newly released document, the plan also revealed that the new area will be governed under a model that is used in special economic zones, with a focus on its economic function, a feature rarely seen in previously announced free trade zones.
Wang said that the new area will seek to reach the standards of the world’s most competitive FTZs and implement globally competitive policies and mechanisms. It will also beef up stress tests for open economies, and facilitate inflows and outflows of investment, cargo, capital, personnel and information from offshore locations.
As observers point out, the positioning and governance model of the new area reflects the Shanghai FTZ’s shift of focus from facilitating trade and investment to liberalizing trade and investment.
The plan clearly states that the new area will build a system with trade liberalization at its core. It identifies five areas as targets of the liberalization drive: investment, trade, capital, transportation and personnel.
Compared with facilitation, which is about loosening regulations and achieving coordination among government bodies under the current policy framework, “liberalization is aimed at meeting the highest global standards and realizing free flows of production,” said Sun Yuanxin, deputy dean of the Free Trade Zone Research Institute, a think tank under the Shanghai University of Finance and Economics (SUFE).
At the same time, experts said that liberalization calls for a new governance mechanism to ensure free flows of capital, technology, personnel and information. This will prompt the new area to undertake a series of key reforms which will entail a big step forward for Shanghai, even for China’s ongoing reform and opening-up drive.
Targeting International Standards
China has designated 12 free trade zones, all of which are transportation hubs with geographical advantages and broad hinterlands, and which are able to boost the regional economy. But compared with their global peers, China’s FTZs are lagging behind in a number of areas.
A higher tax burden is one of the most significant issues. For example, in the Shanghai FTZ, businesses need to pay 25 percent corporate income tax for their offshore businesses, higher than the 16.5 percent rate in Hong Kong or the 17 percent rate in Singapore – these are also eligible for tax cuts or even tax free policies under some circumstances.
In addition, financial innovation is a key task in the FTZ’s exploration for greater opening-up. Although this is the most reformed area in the Shanghai FTZ, many issues remain: a rather low level of opening-up of financial services, slow progress in capital account convertibility and limited functionality of free trade accounts.
The new plan also contains tax breaks for companies that are involved in core segment production and R&D in key areas, as well as protective or zero tariffs for offshore cargo entering the fenced customs areas.
There are also pledges to streamline the process of cross-border yuan business, pilot the integration of local and foreign currencies, and explore freeing up capital flows and the exchange rate in the new area.
But these measures are just a preliminary breakthrough, according to Shao Yu, chief economist at Orient Securities. He believes the ultimate goal of the new area will be a one marked by high standards, characterized by the three zeros: zero tariffs, zero barriers and zero subsidies.
“I expect the FTZ to have great prospects in terms of the financial sector. It will have, on a preliminary basis, the functions we have seen in Hong Kong, Singapore and Switzerland, such as free trade and offshore finance,” Shao said. “At the same time, in the preconditions of controllable risk and increased efficiency, it could fully relax capital account controls and ultimately become a thorough global financial center like London.”
The choice of Lingang as the new area is due to its positioned function and governance model. According to the plan, the new area will not only run under a special mechanism; boosting frontier tech industries’ capacity is another goal.
The plan outlines the need to “choose key fields that meet the country’s strategic demands, have global market demand, require high levels of opening-up which other regions are unable to implement for the time being and implement opening-up policies and institutions with relatively strong global competitiveness.”
In other words, Lingang New Area is able to meet the high standards that other regions cannot at the moment. This also underscores the area’s advantages of a solid industrial foundation with mature conditions for opening-up.
Speaking to reporters at the press conference, Chen Yin, executive vice mayor of Shanghai, said Lingang has gathered more than 500 industrial projects after 15 year’s development, with core businesses involved in new energy equipment, maritime engineering, smart production, biomedicine and artificial intelligence.
Chen stressed the geographical advantages of Lingang. The area is located in the southeastern corner of Shanghai, at the conjunction of Hangzhou Bay and the Yangtze River estuary.
It is around 75 kilometers from downtown Shanghai, with the Pudong International Airport to its north and to the south, Yangshan International Hub Port, which is part of Shanghai Port, the closest deep-water port to the metropolis.
Given the fact that global free trade ports are mostly built at transportation hubs, whether for airlines or container shipping, Lingang is a rare case of integrating aviation, railways, highways and river transportation.
“Lingang has the most complete transportation capabilities compared with its global peers. It can take full advantage of Yangshan deep-water port and Pudong cargo transportation hub’s supporting role for trade and industrial development,” Chen said.
Choosing Lingang to include in the expanded FTZ will help upgrade trade and boost the transformation of the manufacturing sector, said Zhao Xiaolei, dean of the SUFE Free Trade Zone Research Institute.
“The two processes will add momentum to each other and combine to realize high-quality growth of the industrial sector,” he said.