Tuesday, March 3, 2015



China's new free-trade zones

In December 2014 the State Council (cabinet) announced that three new free-trade zones (FTZs), modelled on a similar zone established in Shanghai in 2013, would be created in Guangdong, Fujian and Tianjin. In contrast with most recently established and nationally prioritised zones, which were in western China, they are all situated on the prosperous eastern seaboard. It is too early to tell what impact they will have on their respective economies, but their designation may be more political than economic.
The FTZs, which will formally be established on March 1st, differ slightly from that in Shanghai in that they are not confined to a geographic part of one city. The Guangdong FTZ will include three cities in the province: the Nansha New Area in Guangzhou, the Qianhai and Shekou districts of Shenzhen, and Zhuhai's Hengqin New Area. The Tianjin FTZ will include the Tianjin Port Zone, the Tianjin Airport Economic Zone and the Binhai New Area. The Fujian FTZ will include the Pingtan Comprehensive Experimental Zone, parts of Xiamen (including the Xiangyu Bonded Zone), and parts of Fuzhou (including the Fuzhou Economic and Technological Development Zone).
At the same time, some tweaks were made to the Shanghai FTZ's geographic coverage. The zone, which currently sits near the airport, will be expanded to include the Lujiazui financial district, Jinqiao and the Zhanjiang High-tech zone. Progress in the Shanghai zone has been slow to date, which some have blamed on its location far from the city centre.
Zones here, zones there
The broader aim is to find a new growth model under the "new normal" of economic development pursued by the president, Xi Jinping. Goals include fostering innovation-driven growth and improvement in investment efficiency. Aspirations are lofty. In early January Fujian's party secretary, You Quan, announced that through the establishment of the FTZ, Fujian would create a more international, market-oriented and legalistic business environment, and promote long-term sustainable development.
Development of the plans for these zones is still under way, but reports by local media in January suggest that the three new zones may have some similarities. "Negative lists", which were piloted in the Shanghai FTZ, are likely to be included. The negative list is a departure from how the government normally supervises foreign investment: under this approach, foreign investors should receive equal treatment to Chinese companies in any sector not explicitly restricted on the list. Guangdong is looking to encourage more investment from Hong Kong and Macau by eliminating or relaxing restrictions in a number of services sectors. Fujian FTZ will probably have similar offerings. According to local media, Pingtan, already designated a zone for cross-Strait co-operation, will also issue a negative list; in it, foreign investment in banking, securities and insurance will be subject to limitations, but Taiwan investors will be exempt. Tianjin plans to issue its own negative list as well, and has boasted that its list will be shorter than that of Shanghai.
Plans to ease customs clearances suggest that trade will continue to play a large role in these areas. In late January Tianjin's mayor discussed improving administrative effectiveness and easing custom clearance in Tianjin's port zone. Guangdong's FTZ encompasses Shekou, which hosts ports and logistics. Preferential policies in the area will include eased custom clearance procedures, too, to help raise the competitiveness of the Pearl River Delta region.
Otherwise, plans retain the feel of earlier blueprints for regional development across the country, highlighting certain sectors to be promoted. In Fuzhou, emphasis will be given to cross-Strait e-commerce, service outsourcing and the Internet of Things. Financial services will play a large role in all three provinces. Details are not yet available, but Qianhai in Guangdong, Binhai in Tianjin, and Xiamen in Fujian are all included in their provincial FTZs; all already aspire to be a financial centre for the region, and will probably issue a raft of incentives to encourage further development in this arena. Financial-sector liberalisation was one of the most closely watched initiatives in the Shanghai FTZ, and it was here that expectations have fallen the most. Plans reported for these three provinces discuss building up the financial services sector, but little reference to financial-sector reforms have been made.
Plus ├ža change
It is telling that the regions chosen for these pilots are already developed, with mature business districts and development zones that have been established for years. They show that government efforts to reform the economy are recentring on the eastern seaboard. The cities included in these announcements are some of the richest in the country. They already boast high incomes, large exports and strong foreign direct investment. They are already built up, and have some of the highest property prices in the country.
Why, then, do they need to be declared FTZs? The promotion of more sophisticated services would require a fairly robust services sector to be already present. As services development has been made a priority and China attempts to draw more investment into previously closed sectors like finance, regions that have already started the process and which have fairly strong services sectors have been chosen for tinkering.
Their broader geopolitical position may have been a consideration as well. Encouraging closer economic and professional ties with Hong Kong and Macau appears to be a core component of the Guangdong FTZ. Likewise, integration with Taiwan features prominently in plans for the Fujian FTZ.
Included in Guangdong's proposed measures are plans to allow more professionals from Hong Kong and Macau to practise in the FTZ—it is implied that these will be services providers. The government will also look into ways to make accommodations with regard to social benefits for Hong Kong and Macau residents living in the FTZ areas. In late January Xiamen University announced that it would create a Fujian FTZ Institute to research related issues, such as the internationalisation of the renminbi and the Maritime Silk Road. At the same time, it will ramp up efforts to recruit graduate and doctoral students from Taiwan. Another proposal from Xiamen officials included policies to attract Taiwan "special" talent in technology or innovation to the city. China's efforts to integrate its economy more closely with those of Hong Kong, Macau and Taiwan may have played a role in the selection of these regions for special favour, over other services-oriented cities in Jiangsu and Zhejiang.
How these plans will actually play out remains to be seen. Their implementation will be heavily localised. Proposed plans released by the Guangdong government suggested that it would set up a co-ordination authority to devise strategies, co-ordinate policies and steer reform, but each of the districts included in the Guangdong FTZ will probably be managed by its own district management body, headed by their respective city governments. This has drawn some local criticism that less will be accomplished than in Shanghai, which had fewer layers of bureaucracy. At the same time, other critics say that Shanghai has accomplished rather little since launching the FTZ. Substantial financial market reforms have yet to materialise. One of the most exciting plans to be announced was the lifting of a ban on video-game consoles.
Furthermore, their limited advantages may already be eroding. On January 28th the State Council announced that the ban on the manufacturing and sale of game consoles would be lifted nationwide. The next day, it announced that the rest of the country will be allowed to adopt preferential policies piloted in the Shanghai FTZ in investment, trade and finance. The excitement around these FTZs may prove short-lived.