Shanghai’s Free Exchange Zone: an opportunity for foreign investors

By Alice Kantor

Free storage, free currency trade and flexible interest rates: many a businessman is considering the commercial perks of the Shanghai Free Exchange Zone.

The Chinese government announced on Sep 27^th the opening of a zone of free trade in the autonomous region of Shanghai. The zone, a total of 92,000 square feet, encompasses three areas: a part of Shanghai’s financial district, Pudong, a coast on the region’s North border and Yangshan port, by the East Sea.

A trade haven

The first goal of the zone is to attract commercial exchanges: goods are stored temporarily until sold on the Asian market. Foreign businessmen can store and exchange their products, free of charge and of control, for a specific amount of time. The areas have been strategically placed on the Northern and the Eastern coastal borders so as to facilitate import.

A financial haven

Competing with liberal Hong Kong, a city made by foreign investment, Shanghai is intent on becoming the “golden financial center” of the region.

The second goal of the zone is to attract foreign investment: with progressive liberalization of interest rates and free convertibility of the Yuan, the country’s currency, Shanghai would become a financial haven for investors and financial companies.

State-owned corporations, responsible for 43% of the country’s industrial and business profit at the end of 2011, according to Xinhua, have been consulted and Chinese financial regulations have been loosened. Government officials now authorize foreign capital banks and Chinese offshore operations to occur in the zone, making investment very convenient for foreign venture capitalists. Citibank, one of the world’s leading banks, has started setting up a branch there.

An experimental lab

           

The free exchange zone has opened on Oct 1^st. It will be a three-year experiment. Introducing economic reforms and liberalization on a small scale and in a contained zone is quite representative of China’s political doing. China had already experienced step-by-step reforms in the “special economic zone” of Shenzhen in the 1990s. Experimenting this way, the government can contain any negative effect the zone might have on the country’s economy and eventually dismantle it, if it does not meet the Party’s expectations.

At the Third Plenum, on Nov 8^th, where future economic directives were being discussed, Premier Li Keqiang mentioned the Shanghai exchange zone as an active part of China’s efforts towards “an open market system”, an official communiqué stated.

How the zone works

The Shanghai Free Trade Zone takes on a new level of liberalization. It surpasses the traditional “bonded system”, first implemented in China in 1987. The bonded system requires that operations in a trade zone be supervised by the customs service, but postpones payment of duties until after the products have left the zone.

The Shanghai system, on the other hand, lifts all authorities’ supervision and requires no duties whatsoever.

·     A ticket is paid for registration.

·  The zone has a free of charge entrance policy. Operations like storing, processing and assembling goods are free of charge.

·     To enter Chinese inner territory, a fee must be paid.

·     Finally, no tax is paid when the merchandise is carried out.

Political ambitions

It seems that the launching of the Free Exchange Zone was partly due to Chinese officials reacting to the advancement of the Trans-Pacific Partnership. The TPP, launched in 2005, intends on bolstering North American-East Asian trade. In parallel, the TTIP, the Transatlantic Trade and Investment Partnership, focuses on exchanges between the US and Europe: neither one of those include China as a commercial ally.

Excluded from these agreements, the Chinese government has responded with the creation of the competitive free exchange zone. The political strategy, announced but not advertised by Party officials, is to buoy up the trade potential of Pacific Asia. In that respect, the Shanghai zone should act as a center for Korean, Japanese and Chinese commercial exchanges.

First investors

For now, the deal has mostly attracted Western investors, who have availed themselves of the boon. Whatever the political ambitions are, “the zone seems like a great opportunity for business”, the CEO of Citibank China, Mr. Au, told The Economist.

Overall, some three dozens companies have registered, according to state media, and international banks are considering opening offices. The Wall Street Journal estimates that HSBC holdings should be testing the zone soon as well. Yet, the number of companies registered should rise quickly in the next few months, as officials clarify the zone’s regulations.