SOUTHWESTERN UNIVERSITY OF FINANCE AND ECONOMICS

SCHOOL OF INTERNRATIONAL BUSINESS

Shanghai pilot free trade zone and

its impact on Chinese economy

TABLE OF CONTENT
INTRODUCTION.................................................................................................... - 2 BACKGROUND ..................................................................................................... - 3 MAJOR TASKS AND MEASURES ............................................................................ - 5 1) Accelerate the functional transformation of government ..................................... - 5 Deepened reform in administration system ........................................................ - 5 2) Opening up of investment sectors .................................................................... - 5 Opening up of service sectors ........................................................................... - 5 Explore the "Negative List" administrative approach ........................................... - 6 Set up a system to support outbound investment............................................... - 6 3) Promote the transformation of trade development approach................................ - 6 Promote the transformation and upgrading of trade ........................................... - 6 Elevate the capacity of the shipping service ....................................................... - 7 4) Deepen innovation and opening up of financial services ..................................... - 8 Accelerate the innovation of the financial system ............................................... - 8 Enhance the financial service function .............................................................. - 8 5) Improve regulatory supporting systems ............................................................ - 8 Strengthen protection through regulatory system enhancements ......................... - 8 FUNCTIONS OF SHANGHAI FREE TRADE ZONE ..................................................... - 9 Basic Functions ............................................................................................... - 10 Innovative Functions ........................................................................................ - 10 FEATURES OF SHANGHAI FREE TRADE ZONE ..................................................... - 10 BENEFITS OVER OTHER ZONES.......................................................................... - 11 Financial benefit .............................................................................................. - 11 Customs benefit ............................................................................................... - 11 Administrative benefit....................................................................................... - 12 Competitive regulatory and tax environment ....................................................... - 12 IMPACTS ON CHINESE ECONOMY ....................................................................... - 12 FINANCE......................................................................................................... - 12 COMMERCE AND TRADING.............................................................................. - 13 REGIONAL ECONOMIC .................................................................................... - 14 FUTURE DEVELOPMENT OF SHANGHAI FREE TRADE ZONE ................................ - 15 Expand financial service functions..................................................................... - 15 Expand functions of headquarter economy ......................................................... - 15 Expand trade service functions.......................................................................... - 15 Expand shipping service functions..................................................................... - 16 CONCLUSION ..................................................................................................... - 17 REFERENCES:.................................................................................................... - 18 -

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INTRODUCTION
A traditional Free Trade Zone is an area within which goods may be landed,
handled, manufactured or reconfigured, and re-exported without the intervention
of the customs authorities. Free-trade zones are organized around major seaports,
international airports, and national frontiersareas with many geographic
advantages for trade.
The concept of free trade zones in China is not new. In the 1980s, a number of
Special Economic Zones (SEZ), the most famous of which was Shenzhen, which
allowed foreign companies the freedom to invest and build factories, kick -starting
the nations rapid growth. Such reforms eventually spread throughout the entire
nation, turning China into the workshop of the world and helping China to become
the 2nd largest economy in the world.
Shanghai Free-Trade Zone (Shanghai FTZ) is the first free trade area in mainland
China launched on September 29, 2013 by Chinese Premier Li Keqiang. Official
name of Shanghai FTZ is China (Shanghai) Pilot Free -Trade Zone (CSPFTZ), the
zone covers an area of 29 km2, integrating four existing bonded zones
Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free
Trade Port Area and Pudong Airport Comprehensive Free Trade Zone.
The new zone is being seen as the most important attempt at reform since
Communist leader Deng Xiaoping, the architect of China's transformation to a
market economy, designated Shenzhen on the border with Hong Kong a special
economic zone in 1980. The establishment of the Shanghai free -trade zone is a
significant move for China to conform to new trends in the global economy and
trade.
Focusing on the strategic requirement of serving China from global
perspective and the strategic mission of construction of four centers in shanghai,
the construction of Shanghai Pilot Free-Trade Zone is to actively explore innovative
management model of government in trade and investment in China, open service
industry wider to the rest of the world. China (Shanghai) Pilot Free -Trade Zone will
be progressively developed into a zone featured with investment and trade
facilitation up to international standards, free conversion of currencies,
convenience and efficiency, and internationally recognized legal environment.
Hence, it will be prompted to be a pilot zone for implementation of new rules for
international investment, a spearheading zone for trade in services innovation, a
cluster zone for offshore industrial system, a precursor zone for overseas
investment services, an antecedence zone for improved supervision and a
demonstration zone for innovative government administration.
The establishment of China (Shanghai) Pilot Free Trade Zone is a significant
measure taken by the Party Central Committee to promote reform and opening-up
under the new situation and undertakes a major task to explore new ways and
accumulate new experience for deepening of reform and opening up in an allround way.

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BACKGROUND
With its economic growth rate falling and its labor costs climbing, China was no
longer able to rely on exports alone to support its economic growth. Considering its
economy flagged by excess production capacity and high energy consumption, the
country needed a way to deepen its financial reform and transform its economic
structure.

December 2003

Siwei Cheng, former National Peoples Congress Vice Chairman, proposed that
China is ready to set up a reform pilot for the transformation of bonded zones
into free trade zones. The selected date of the reform pilot was to be declared
soon. .

March-end 2013

Keqiang Li, Premier of the State Council, during his research trip to Shanghais
Waigaoqiao Bonded Zone encouraged the city to establish a pilot free trade zone on
the basis of the existing comprehensive bonded zone.

14 May 2013

The FTZ is approved to become a national-level project.

June 2013

Having been revised and improved, the General Plan for China (Shanghai) Pilot
Free Trade Zone (the Plan) is submitted for approval to the Ministries and
Commissions under the State Council.

July 2013

The State Council executive meeting approved the General Plan (the Plan) in
principle.

10-11 July 2013

In the fifth round of China-US Strategic and Economic Dialogue, China State
Councilor Yang Jiechi and US Secretary of State John Kerry agreed to take
measures to deepen bilateral trade and investment relations, as well as to
establish an open environment for trade and investment.

22 August 2013

The Press Office of the Ministry of Commerce announced that the State Council
has approved the establishment of the FTZ, and that the Plan would be published
after the completion of relevant legal procedures.

27 September 2013

The State Council published the Plan on its official website in its release of Guofa
[2013] No. 38.
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29 September 2013

The Shanghai Government published the Administrative Measures for FTZ in

Shanghai MPG Order [2013] No. 7.

November 2013

The 3rd plenum of the 18th CPC Central Committee proposed to relax its
restrictions on admittance of foreign investment and to speed up FTZs
development.

2 December 2013

The PBOC released: Opinions of the Peoples Bank of China to Support FTZ in
Financial Sector.

6 January 2014

The Chinese Central Governments Official Web Portal published Decision of the
State Council on Temporary Adjustments to the Administrative Approval Items or
Special Administrative Measures on Access Prescribed in Relevant Administrative
Regulations or State Councils Documents in FTZ.

20 February 2014

The PBOC Shanghai Head Office issued Circular of the Peoples Bank of China
Shanghai Head Office on Supporting the Expansion of RMB Cross-border Business
in FTZ (see Appendix IV); and Circular of the Peoples Bank of China Shanghai
Head Office on the opinion of Shanghai payment institutions conducting Crossborder RMB payment business.

25 February 2014

The PBOC Shanghai Head Office issued Circular of the PBOC on removing the
ceiling of interest rate for small-denomination deposits in foreign currencies in FTZ.

28 February 2014

The State Administration of Foreign Exchange Shanghai Branch issued Circular of

the State Administration of Foreign Exchange Shanghai Branch on Issuing
Implementing Rules for Foreign Exchange Control to Support the Construction of
FTZ. The PBOC Shanghai Head Office issued Circular of the Peoples Bank of
China Shanghai Head Office on Practically Conducting the Anti-money Laundering
and Anti-terrorism Financing Work in FTZ.

5 March 2014

In the Shanghai group discussion of the second session of the 12th National
Peoples Congress, President Xi Jinping stressed the construction of FTZ as a
national strategy and asked the nation to construct bravely, try boldly, reform
freely adhering to the international rules. And, thereafter, summarized the
experiences gained on constructing FTZ, which can be promoted nationwide.
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MAJOR TASKS AND MEASURES

Based on the unity of openness expansion and system reform, and the unity of
functional development and policy innovation, the China (Shanghai) Pilot Free
Trade Zone aims to develop a framework in line with international norms for
investment and trade. To do so, one needs to bear in mind the strategic
requirements of going to the world and serving the nation, as well as the strategic
task of building "The Four Centers of Shanghai, and take actions to experiment
step by step with risks under control.

1) Accelerate the functional transformation of government

Deepened reform in administration system
The China (Shanghai) Pilot Free Trade Zone will accelerate the functional
transformation of government and governmental administrative management
innovation. An administrative management system meets and fits with
international trade and investment standards will be established. The focus of
administrative management procedures will shift from prior approval to mid-event
control and subsequent supervision. A service pattern will be set up to materialize
one-off acceptance, integrated examination and approval, and efficient operation.
An online information platform will be established to consolidate information and
improve information sharing amongst various departments. A comprehensive
assessment mechanism of industry information tracking, supervision and
collection will be established, to strengthen the tracking, administration and
supervision of activities outside of the zone conducted by entities registered in the
China (Shanghai) Pilot Free Trade Zone. A joint supervision and enforcement
system will be implemented to cover the areas of quality and technical supervision,
food and drug supervision, intellectual property, industry and commercial
administration, and tax administration to enhance efficiency. In addition to
relevant administrative authorities, the social forces are also encouraged to take
an active part in market supervision. Transparency in administrative management
will be enhanced, and the information disclosure mechanism that reflects the
participation of investors and is in line with international norms will be established.
To protect the interests of investors, various administration reforms will be put in
place, for instance enhancing fair competition, and allowing qualified foreign
investors to remit investment gains at their discretion. An intellectual property
related dispute resolution and assistance system will be established.

2) Opening up of investment sectors

Opening up of service sectors
The financial services, transportation services, commerce and trade services,
professional services, cultural services, and public services sectors are selected to
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be enlarged and opened (for a detailed list please refer to the appendix), and
market access restrictions such as requirements concerning the qualification of
investors, limitations on foreign participation, restrictions concerning business
scope, etc., (except in respect of banks, information and communication services)
will be suspended or cancelled, in order to create an environment of equal market
access for the benefit of all investors.
Explore the "Negative List" administrative approach
The China (Shanghai) Pilot Free Trade Zone will reform the administrative
approach of foreign investment based on international norms. Trial national
treatment on investment permission and a "Negative List" mechanism will be
implemented within the zone. For the projects that are not stated in the "Negative
List", foreign investors and domestic investors will receive the same treatment, by
going through filing procedures instead of approving requirements (with the
exception of areas specifically defined by the State Council). Shanghai Municipal
People's Government will be in charge of the project filing procedures. The
approving requirement on foreign investment contracts and Articles of Association
will be replaced by a filing procedure with Shanghai Municipal People' s
Government, with the same follow up procedures finished according to the current
laws and regulations. The registration process with the Administration of Industry
and Commerce will be aligned with the business registration system reform, and
the process will be optimized. National security review system will be improved,
and pilot national security review on foreign investment projects will be trialed in
the China (Shanghai) Pilot Free Trade Zone to constitute a safe and efficient open
economic system. A foreign investment administrative system that is aligned with
international standard will be set up.
Set up a system to support outbound investment
The China (Shanghai) Pilot Free Trade Zone is aiming at the reform of outbound
investment administration by principally implementing the filing system on the
setup of overseas companies and on the general outbound investment projects.
The Shanghai Municipal People's Government will be in charge of the filing
procedure on general outbound investment projects to facilitate the convenience
on outbound investment. A new investment service enhancement mechanism will
be created to strengthen the post outbound-investment administration and service,
and to set up an information-monitoring platform shared by multiple government
departments for statistics and annual inspection purposes. Various types of
investors in the China (Shanghai) Pilot Free Trade Zone are encouraged to conduct
outbound investment in different forms. SPVs specializing in overseas equity
investment are encouraged to be set up in the China (Shanghai) Pilot Free Trade
Zone, and qualified investors are encouraged to establish fund of funds for making
offshore equity investments.

3) Promote the transformation of trade development approach

Promote the transformation and upgrading of trade
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The China (Shanghai) Pilot Free Trade Zone is cultivating new trading types and
functions, aiming to increase China's competitive advantage and enhance their
position in the global trade value chain by focusing on the development of
technology, brands, quality and service. Multinational companies are encouraged
to set up Asia-Pacific regional headquarters and/or operation centers with
comprehensive functions of trading, logistics, settlement, etc. More efforts will be
made to promote Shanghai as the international trade settlement center, and to
expand the function of the special account on cross-border receipt or payment and
financing under trade in service. Enterprises in the China (Shanghai) Pilot Free
Trade Zone will be supported to develop offshore business. Enterprises are
encouraged to employ an overall plan in international and domestic trade to
integrate the development of domestic and foreign trading business. International
commodity trading and resource configuration platform will be explored to trade
energy products, basic industrial raw materials and agriculture commodities. The
ongoing pilot bonded futures delivery will be expanded and improved and the
warehouse receipt financing and other functions will be extended. The
establishment of outbound cultural trade bases will be accelerated. The
outsourcing service sectors include bio-pharmaceuticals, software and information,
management consulting, data services etc. will be encouraged. Financial leasing
companies will be allowed and encouraged to set up project companies in the
China (Shanghai) Pilot Free Trade Zone and to carry out domestic and
international leasing business. Third-party inspection and appraisal institutions
are encouraged to set up with appraisal results be acceptable in accordance with
international standards. High-tech and value-added maintenance services will be
trialed in the China (Shanghai) Pilot Free Trade Zone. Cross border e -business
service function will be cultivated, and a system covering customs, inspection &
quarantine, tax refunds, cross-border payment and logistics will be set up to
support cross-border e-business.
Elevate the capacity of the shipping service
The China (Shanghai) Pilot Free Trade Zone will leverage on the Waigaoqiao Port,
Yangshan Deep-Water Port and Pudong International Airport to form a shipping
development system and operation model that will have strong global competitive
advantages. Shipping related services such as shipping financing, international
ship transportation, international ship management, and international ship
brokerage, will be proactively encouraged. Additionally, the development of freight
index derivatives will be accelerated. Transition and LCL businesses will be further
promoted. Foreign ships owned or indirectly owned by Chinese invested companies
are allowed to pilot the coastal shipping between domestic coastal ports and
Shanghai port. Pudong International Airport is encouraged to increase the number
of flights for cargo transition. By utilizing the geographic advantages of Shanghai
and the preferential taxation on Chinese flag of convenience?ships, qualified ships
will be encouraged to register in Shanghai. The China (Shanghai) Pilot Free Trade
Zone will implement the international ship registration policy as piloted in Tianjin.
The application process on permitting international shipping will be simplified to
create a more efficient ship registration system.

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4) Deepen innovation and opening up of financial services

Accelerate the innovation of the financial system
Under proper risk control, the China (Shanghai) Pilot Free Trade Zone will pilot
RMB capital account convertibility, interest rate liberalization, and the crossborder use of RMB. In China (Shanghai) Pilot Free Trade Zone, the assets by the
financial institutions will be at market rate. The China (Shanghai) Pilot Free Trade
Zone will explore the trial of a foreign exchange administrative system that is in
line with international practice to better facilitate trade and investment.
Enterprises are encouraged to leverage on both domestic and international market
resources to liberalize cross-border financing. Administration on foreign debt will
be further reformed to facilitate cross-border financing. Foreign exchange
centralized operation by multinational companies' headquarters will be enhanced
to encourage the setup of regional or global treasury centers in Shanghai. A
mechanism needs to be established to associate financial reforms in the China
(Shanghai) Pilot Free Trade Zone and Shanghai's development into an international
financial center.
Enhance the financial service function
The finance sector will be fully opened to private investors and foreign invested
financial institutions. Foreign-invested and Sino-foreign equity joint venture banks
will be allowed to incorporate in the China (Shanghai) Pilot Free Trade Zone.
Platforms for international transactions will also be permitted to be established in
the China (Shanghai) Pilot Free Trade Zone by financial markets. The oversea
companies will gradually be allowed to engage in commodity futures trading.
Financial market innovations are encouraged. Equity escrow institutions will be
supported to setup comprehensive financial service platform in the China
(Shanghai) Pilot Free Trade Zone. The cross-border RMB reinsurance business is
also encouraged to cultivate reinsurance market.

5) Improve regulatory supporting systems

Strengthen protection through regulatory system enhancements
A regulatory system of high standard investment and trade rules will be developed
rapidly to serve the needs of the China (Shanghai) Pilot Free Trade Zone. In regard
to the content of the pilot, some administrative regulations and provisions in the
State Councils documents will be terminated according to the prescribed
procedures. Among these regulations and provisions, certain administrative
examination and approval requirements under "Law of the People's Republic of
China on Wholly Foreign Owned Enterprises", "Law of the People's Republic of
China on Sino-Foreign Equity Joint Venture Companies", "Law of the People's
Republic of China on Sino-Foreign Cooperative Joint Venture Companies" will be
temporarily adjusted and such adjustment will be tentatively implemented in the
next three years started from 1 October 2013. The government departments shall
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support the expansion and opening of service industry in the China (Shanghai)
Pilot Free Trade Zone, the deepening of pilot reforms on the implementation of
"National Treatment" on investment permission and "the Negative List"
management approach, and solve the problems in regulatory protection during the
pilot period. The Shanghai Municipal People's Government will establish an
administrative system through local legislation in correspondence to the demands
of the China (Shanghai) Pilot Free Trade Zone.

FUNCTIONS OF SHANGHAI FREE TRADE ZONE

The Shanghai Free Trade Zone, in spite of its name, differs from conventional free
trade zones in the following two aspects.
First, the functions of Shanghai Free Trade Zone are far more comprehensive than
those of traditional free trade zones in terms of both openness and international
cooperation. In regards to both economic theories and empirical experience, free
trade zones are a special sort of regional trade agreements (RTA). Depending on the
degree of regional economic integration, RTAs can be categorized into five varieties
including free trade zone, tariff treaty, common market, economic union, and full
economic integration. Conventional free trade zones focus on trade liberalization
and mainly tackle tariff and non-tariff barriers. By comparison, common markets
not only eliminate such barriers but also promote trade liberalization in services
and facilitate the free flow of production factors such as capital as well as labor.
Within the Shanghai Free Trade Zone, tariff and non-tariff barriers will be
eliminated so that goods will be able to flow freely across borders. Furthermore,
international trade in services will be liberalized, while restrictions on the
movement of both capital and personnel will be relaxed. Therefore, when it comes
to functionality and economic integration, the Shanghai Free Trade Zone has
exceeded the definition of free trade zones and is consistent with that of a common
market.
Second, conventional free trade areas are formed after two or more consenting
sovereign states or economies negotiate free trade agreements that eliminate tariff
and non-tariff barriers. In contrast, the Shanghai Free Trade Zone is a unilateral
initiative that does not require reciprocal treatment. Being neither a sovereign
state nor an independent economic entity, Shanghai will find it difficult to strike
any substantive trade deals with other parties.
Clearly, according to conventional definition, the Shanghai Free Trade Zone is
neither a free trade zone nor a regional trade agreement. Instead, it strives to
become a free port, which is similar with Hong Kong in terms of openness to trade
and investment as well as the free flow of capital and personnel. In other words,
the Shanghai Free Trade Zone, with an area of 28.78 square kilometers, could be
considered a microcosm of Hong Kong, a free port that spans about 1,100 square
kilometers.

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Basic Functions

International Trade. All sorts of trade can be conducted in the free trade
zones, including import and export, re-export, offshore trade, service trade,
etc.
Modern Logistics. A comprehensive logistics service is available in the free
trade zones, including warehousing for bonded goods, procurement and
distribution, supply chain management, etc.
Exhibition and Trade. Merchants can have their bonded cargos and
commodities exhibited in the free trade zones and a whole set of services is
available for import and export agents, exhibitors and companies after-sale.
Research and Development and Manufacturing. Companies in the free
trade zones can carry out manufacturing, software development, research
and development of pharmaceutical products and other outsourcing service s.

Innovative Functions

Financial Leasing. Besides launching aircrafts and single-vessel leasing

projects and other special purpose vehicle leasing projects, other SPV
projects will be extended to marine engineering, complete sets of heavy
equipment, railway transportation equipment and other areas. Build up an
assets securitization and transferring platform, providing high-end shipping
financial service.
Settlement Center for International Trade. Simplify foreign currency
settlement procedures on the basis of each company's credit record. Allow
qualified enterprises to open a special foreign currency account to deal with
international trade settlement.
Bonded Futures Settlement. Bonded cargos can be used as the subject
matter for futures contracts in domestic futures transaction platforms.
International Container Reconsolidation Service. Cargos that have
arrived at Shanghai ports can be sorted and re-packed inside the free trade
zones to be distributed as new containers to overseas destinations.

FEATURES OF SHANGHAI FREE TRADE ZONE

The Zone is being used as a testing ground for a number of economic and social
reforms. For example, the sale of video game consoles, banned in China since 2000,
will be allowed within the zone, with Microsoft aiming to have its X box on the
market by late April. Consoles and individual games will still be subject to a case by-case approval by the Shanghai Municipal Administration of Culture, Radio,
Film & TV for manufacture and sales in China.
The State Council released the Overall Plan for China (Shanghai) Pilot Free Trade
Zone (the "Plan") on September 27. In terms of the contents of the Plan, Shanghai
Pilot Free Trade Zone has three features:
First, the proactive and intrinsic opening is reflected. At present, China has
faced the key moment of reform and opening. Facing with new
circumstances and new tasks, there must be new methods, new modes and
new trials to realize the promotion of development, reform and innovation
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through opening. Shanghai Pilot Free Trade Zone is a new trial for China to
expand reform and opening.
Second, the core is the innovation of system. Shanghai Pilot Trade Zone
reflects the national strategy, and is of high level of reform and innovation.
In the pilot policies, there are a lot of aspects concerning innovation of
systems. For example, to promote reform of foreign investment management
mechanism and to pilot negative list management mode that, in sectors
beyond the negative list, the approval system is altered into filing system
based on the system of consistency between domestic and foreign
investment. This is a major breakthrough in the reform of administration
system.
Third, Shanghai Pilot Free Trade Zone features as a model. Shanghai Pilot
Free Trade Zone acts as the test field for reform and opening, to explore
new thoughts and new methods for China to expand opening and intensify
reform and form replicable and extendable experience, to make a
demonstration for China and bring its role into full play to serve the whole
country. For example, the early opening of relevant service sectors and early
and pilot implementation of convertibility of RMB capital accounts, interest
rate liberation of financial markets, cross-border use of RMB will accumulate
important experience for further and comprehensive intensification of reform
and opening in the future.

BENEFITS OVER OTHER ZONES

Financial benefit
Foreign banks will be able to establish WFOE or majority-controlled subsidiaries
within shorter time frames. The financial institutions are expected to progressively
be granted licenses for cross-border financial products. The promotion of renminbi
convertibility and relaxed administrative controls will greatly facilitate treasury
cross-border fund management for companies financial and non-financial alike
with regional headquarters in China. Different than other bonded areas, the
biggest feature of FTZ is the special custom monitoring system called Domestic
but out of Customs, which means open the A line (Free Trade Zone and boarder
line) and control the B line (Free Trade Zone and Non Free Trade Zone). This
expedited clearance of goods and materials is beneficial in terms of cost and time
for logistics companies specifically.

Customs benefit
Overseas shipments will not need customs clearance until a later stage, simplifying
the operation of logistics companies within the FTZ. Reducing costs and
complexities involved in the logistics could further encourage international
manufacturers to set up a regional manufacturing and logistics hub in Shanghai.

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Administrative benefit
An important reform which will attract foreign investors is a drastic simplification
of the administrative burden of applying for approval and registration within the
FTZ. Foreign investors within the zone will be subject to the same application
procedure and requirements as domestic investors and the process will require a
single application at a single location, provided their business scope is not
contained within the Negative List for which special approval is needed.

Competitive regulatory and tax environment

New tax policies are being adopted to support innovative business models. Firms
may choose to pay Import taxes that apply to imported components, or the Import
taxes applying to the finished components.

IMPACTS ON CHINESE ECONOMY

Currently, the liberalization of trade and investment and integration of regional
economy have become a trend and a new drive for the growth of global economy.
Shanghai Pilot Free Trade Zone, under the guidance of accelerating
implementation of a more active and positive opening strategy, promote s reform
and development with opening in a way of following the new trend of global
economic and trade development. Shanghai FTZ combines expansion of opening
with reform of systems, cultivation of functions with policy innovation in a method
of early and pilot implementation, controllable risks, step-by-step promotion and
gradual improvement to form a basic system framework that connects with the
general international investment and trade rules.
Shanghais Free Trade Zone (FTZ) has been established to increase the trade and
investment flows in the country. The main principles of it are: experimenting with
RMB convertibility, liberalization of interest rates and cross -border usage of RMB,
reduced red-tape, and less governmental control over financial flows. Overall, the
government hopes that the establishment of the FTZ will play a part in China
integrating further in the global economy and will promote further economic
development at home.

FINANCE
With respect to the financial sector (banking, health medical insurance, financial
leasing), the goal of the new zone is to promote financial innovation, interest
liberalization and full capital account convertibility. Over the next several years
restrictions in all these areas will be loosened. Moreover, investment approval for
the zone is shifting to a negative list system, meaning investment areas not
explicitly prohibited will be approved. Following the State Council announcement,
the CBRC and CSRC, released follow-up guidelines for banks and securities firms
seeking to establish operations in the zone.
From a broader perspective, the FTZ has the potential to promote two key areas of
economic reform, helping Chinese firms expand abroad and strengthening
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domestic capital markets. China has long pushed domestic firms to expand
abroad as part of the going out strategy, but overseas investment is still small
relative to the size of Chinas economy and largely dominated by state -owned
enterprises. Expanding abroad may become easier now with new regulations that
encourage firms within the FTZ to seek financing abroad and allow domestic banks
to more easily offer cross-border financial services. This should make overseas
expansion easier for smaller firms who often lack strong banking relationships and
have limited access to foreign financing.
Chinese capital markets should also receive a boost from the FTZ. Qualified
individuals and companies in the zone will be allowed to invest in foreign and
domestic equity and futures markets. This represents a break from the existing
QFII and QDII programs where investment quotas are allocated by SAFE. Instead
of a quantitative restriction on inflows and outflows, there will be a geographic
restriction. Depending on how easy it is for financial firms to set up operations
within the zone, these new rules could help boost the foreign share of portfolio
investment in China which right now stands at a measly 4 percent of GDP.
The key dynamic for policymakers regulating the FTZ will be how to promote
substantive liberalization without spreading financial risk to the broader economy.
To be successful, the FTZ will need to make it easy for both foreign and domestic
firms to establish operations and move capital across the border. However, due to
the fungibility of capital, financial flows are very difficult to contain within set
geographical confines. To counteract this, the requirements for establishing within
the zone will have to be tight enough to keep out firms without legitimate
international operations. This should help limit, but not eliminate, the impact of
the zone on the rest of the economy.

COMMERCE AND TRADING

Liberalization and regulatory measures should proceed side by side and
liberalization should be progressive. The experience of the pilot must be replicable
and suitable for promotion on an extensive scale in China. The impact of the
establishment of the Shanghai free trade zone on commerce will likely be indirect,
progressive and long-term.
In commercial services, the provision of value-added telecommunications services
and the sale and services of games consoles and arcade games will be permitted in
the free trade zone. With the further liberalization of value-added
telecommunications services, global cloud computing heavyweights are expected to
rush into the zone. The liberalization of the sale of games consoles and arcade
games and the provision of related services imply the lifting of the ban previously
imposed on these products and services. This will not only spur the growth of
those industries but will also further stimulate innovation in the development of
smart TVs which have witnessed rapid growth in recent years.
The outside world has pinned much hope on permission to operate duty-free shops
in the free trade zone, but there was no mention of this in the General Plan. The
fact is, industries will be the dominant function in the zone, while residential and
livelihood functions only play a supporting role. Moreover, it is reckoned that duty free shops will form a price trough, causing purchasing power to move in from
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outside the zone. As such, it will not have much effect in bringing back the
purchasing power for luxuries that has drifted offshore (because prices at the
duty-free shops will have no advantage over prices in Hong Kong). Thus, they are
of little help to the growth of the domestic market and economy.
On the negative list for the wholesale and retail sectors, there are not many
categories that are subject to special control. The list only covers important
commodities like grain, cotton, vegetable oil, tobacco, salt, chemical fertilizers,
agricultural films, and crude oil and finished products that have a vital bearing on
the national economy and the people's livelihood, some audio-visual products and
relics, as well as direct selling, mail order selling and online selling. Foreign direct
selling and mail order businesses like Amway and Mecoxlane have in fact been
operating in the Shanghai market long before this.
Of course this is just the negative list for 2013. The list is expected to be trimmed
rather than expanded in 2014 and 2015. The scope and content of liberalization in
the Shanghai free trade zone are expected to gradually expand based on progress
in such areas as implementation of liberalization pilots, improvement of
management and adaptability of companies.

REGIONAL ECONOMIC
The Shanghai Free Trade Zone will help usher in a new phase of reform and thus
provide the necessary conditions for economic upgrade. Even though the Shanghai
Free Trade Zone has been in motion for only eight months, it has unleashed a
ripple effect, with Guangdong, Tianjin, Xiamen, Chongqing, and Zhoushan having
submitted applications for setting up free trade zones. Recently, Guangdong and
Hong Kong have brought up the idea of a free trade zone comprised of Guangdong,
Hong Kong, and Macau, which will help Hong Kong better take advantage of its
strengths and unique position in the global economy. In order to boost growth in
the Pearl River Delta, trades in goods and services will be liberalized, while
financial innovation and cooperation will be encouraged. As more and more free
trade zones emerge, trade liberalization will become increasingly full-fledged.
As for Shanghai, the free trade zone will help the city achieve its goal of becoming a
global economic center. In the past two years, due to the lack of reform measures,
the pace of Shanghais economic growth was near rock bottom in the nation. Now
that the free trade zone has provided Shanghai with a great opportunity to open up
its economy and develop offshore trade and finance, the city will over time emerge
as a trading, shipping, and financial center. For instance, when it comes to
regional headquarters of multinational corporations, supply chain management is
a core function. For the time being, most of Fortune 500 companies have entered
the Shanghai market, and the Shanghai Free Trade Zone will help the city become
a hub of supply chain management.
From a regional perspective, the Shanghai Free Trade Zone will drive economic
growth in the Yangtze River Delta, which is currently the largest regional economy
in China and aims to become a world-class cluster of cities. With modern logistics,
quality services for commerce, and financial innovation, the Yangtze River Delta
will be better equipped to boost growth. For instance, as it stands now, about 90%
of container cargos in Shanghai Port originate from the Yangtze area. Therefore,
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provinces and cities in the region will all benefit from the Shanghai Free Trade
Zone and turn in strong economic performance.
As for Hong Kong and especially its financial services sector, the Shanghai Free
Trade Zone will inevitably bring about challenges. Hong Kong should proactively
deal with these challenges and turn them into opportunities. On one hand, the free
trade zone will provide Hong Kongs financial industry with a platform to enter the
Yangtze River Delta. On the other hand, Hong Kongs mature legal system, high
degree of internationalization, and excellent business environment makes the city
an ideal place to connect the Shanghai Free Trade Zone and global markets. In the
future, Hong Kong and the Shanghai Free Trade Zone can cooperate extensively in
the areas of offshore trading, cross-border financing and investments, offshore
RMB lending, RMB bond issuance, trading, and settlement, as well as professional
services such as legal, accounting, and management.

FUTURE DEVELOPMENT OF SHANGHAI FREE TRADE ZONE

Shanghai Free Trade Zone is an engine to accelerate the citys construction of four
centers Financial, Economic, Trade, and Shipping. Below you can see a list of
future development of Shanghai FTZ.

Expand financial service functions

Support the setup of mother funds for equity investment in foreign countries;
Private capital and foreign-funded financial institutions practice;
Build financial transaction platform ,adapting to international practice;
Overseas enterprises are permitted to engage in commodity futures trading;
Reform the management modes of external debts;
Support RMB cross-border reinsurance business;
Back the establishment of overall financial service platform.

Expand functions of headquarter economy

Encourage multinationals to set up their Asia-Pacific regional

Develop operation center that integrates such functions as trade, logistics
and settlement and the like
Deepen the pilot program in international trade settlement and expand such
functions as cross-border payment for trade in services, payment in foreign
exchange for non-trade purposes and financing under the special accounts
Deepen the pilot management of centralized operations of the foreign
exchange funds for multinational companies headquarters and promote
multinational companies to set up their regional or global fund management
centers.

Expand trade service functions

Subsidiaries of financial leasing projects;

Commodity trading;
Bonded delivery of futures;
Construction of international cultural trade base;
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R&D and service outsourcing;

Hybrid global maintenance and testing base;
The Cross-border e-commerce platform;
Bonded exhibition and trading platform.

Expand shipping service functions

Develop shipping finance;

International transit and LCL;
International shipping;
Transaction of freight index derivatives;
International ship management;
Explore the establishment of international ship registration system;
International shipping brokerage and other industries;
Foreign ships owned or indirectly owned by Chinese -invested companies are
allowed to pilot the coastal shipping.

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CONCLUSION
The creation of a Shanghai Free Trade Zone is the Chinese government's latest
major initiative in adapting to global economic development trends and furthering
its opening up to the outside world. It is conducive to cultivating new advantages
for China in the face of global competition. Moreover, it will help build a new
platform for its cooperation with other countries and regions, develop new space
for economic growth and build an upgraded version of the Chinese economy.
The Shanghai FTZ has four main goals. The first is achieving zero tariffs on all
merchandise traded, including

agricultural

products. The

second

involves

protecting intellectual property rights, and making sure that labor, environmental
and safety conditions meet international standards. The third centers on
enhancing economic and regulatory fairness and transparency, and removing
subsidies and preferential support for specific industries and state -owned
enterprises. The fourth is to fully liberalize the financial services industry, and
open up the capital account to facilitate the free convertibility of currency and
movement of capital.
The Shanghai Free Trade Zone should also aim to include all major industries to
create a fair sense of competition among state-owned, private and foreign
businesses. It should follow the negative-list approach of granting access to any
businesses that are not prohibited, and change the traditional method of
examining and approving tenants to a registration-based system.
The Shanghai Free Trade Zone has enormous potential and is full of possibilities.
However, one should not lose sight of the fact that the zone is still a pilot project,
while its experimental nature suggests that risks and challenges will be
unavoidable. For instance, arbitrage opportunities may arise while the capital
account is being opened; a new legal system may be necessary; and the functions
and mentality of government may need to be changed. In order for this experiment
to succeed, these major issues will have to be resolved.

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