FTZ viewed with hope, skepticism
By Zhang Yuwei
( China Daily )
Shanghai's pilot free trade zone is intended as a showpiece for possible broader reform in China. US investors have high expectations, as well as doubts, as Yuwei Zhang reports from New York.
More than 90 policies cover five major economic areas. There's a 10-page "negative list" putting 18 major sectors (with 1,067 subcategories) of business off-limits to foreign investors.
The list also has 190 special regulations, which outline additional sectors closed to foreign investors.
Welcome to the China (Shanghai) Pilot Free Trade Zone), a 29-square-kilometer project launched late last month that's raising expectations — and doubts — within the nation and overseas.
The FTZ is frequently likened to the Shenzhen Special Economic Zone, which since its establishment in 1980 has boosted manufacturing and exports and attracted overseas investments. Some predict the FTZ will threaten Hong Kong's position as an established financial hub.
"If we think about the Shanghai free trade zone as a test market — as Shenzhen was — so what's learned in Shanghai can be rolled out to the rest of the country, that would be a very big deal, that would be truly a ‘reform and opening up' 2.0," said Carlos Gutierrez.
He's the former US secretary of commerce, now a vice-chairman of the Albright Stonebridge Group, a global strategy firm led by Madeleine Albright, the former US secretary of state.
"I don't think it's unrealistic to have high expectations," Gutierrez said in an interview with China Daily. "China has always exceeded expectations."
Located on the outskirts of the coastal metropolis of more than 23 million people, Shanghai's FTZ is expected to explore ways to reduce government intervention and open up the world's second-largest economy to international investment.
"This is in line with global economic trends and reflects a more active strategy of opening up," said Commerce Minister Gao Hucheng at the zone's inauguration ceremony.
The timing of the zone's formation — just before the Third Plenum of the 18th Central Committee of the Communist Party of China — also has been widely discussed.
Experts believe that the zone is a testing ground for policies and procedures that will expand into other parts of the country. They also believe that the FTZ represents a commitment by the country's new leadership to deepening market-oriented reforms and boosting the economy.
"In the buildup to the Party's Third Plenum, there has been much speculation over the policy priorities and reform initiatives," said James Sinclair, managing partner of InterChina, a Shanghai-based strategy and merger-and-acquisition advisory firm that focuses on China.
Bulls vs bears
"The establishment of the Shanghai FTZ has been feeding this speculation," added Sinclair, who has lived in Shanghai for the past decade. "The China bulls are using the FTZ to project their hope for sweeping reforms ahead. The China bears remain skeptical, pointing to the FTZ's lack of detailed policies and initiatives, and concern about the prospects of the Third Plenum unveiling meaningful reforms."
Gutierrez said that the creation of the FTZ shows that the new leadership is serious about economic reform, and the project is one way for the nation to "offset" the pressure of losing manufacturing competitiveness because of wage increases.
"They are serious about reform and they understand that manufacturing is changing. As wages increase, manufacturing may go overseas, so China needs another growth engine," said Gutierrez. "And that growth engine could be the combination of a more open economy and more liberalization of financial services and other services."
As many link the rationale behind the creation of the new zone to the new leadership's economic reform agenda, Bo Chen, who advised the government on the zone, said that it was also driven by slower economic growth in China and "foreign aggression".
The influence of the Trans-Pacific Partnership Agreement is one example of that aggression, Chen wrote in a recent online commentary. Initiated in 2005, the TPP requires member countries to eliminate all tariffs and open their agricultural and financial services as part of the pact's bid to build a unified market in the Pacific Rim by 2020.
Membership in the trade pact grew significantly after the United States signed up in 2008.
The TPP was not immediately welcomed by some Asia-Pacific countries. Japan and Vietnam were persuaded by the US to join the negotiations, and China said that it would consider doing so in the July round of the US-China Strategic and Economic Dialogue.
"Despite rumors about what reforms the FTZ may herald, its long-term policy objectives will generally remain consistent with the requirements of the TPP," said Chen.
A close look at the zone shows that it does offer some policies that might attract foreign investment, especially when every global company wants a success story in China.
Blueprint for change
A government blueprint of the FTZ shows more than 90 policies. The policies, which cover five major areas, are:
Transforming government functions
Easing restrictions on foreign investment
Facilitating international trade by further opening the service sector
Deepening financial reform
Improving the regulatory and taxation systems
"While previously other similar zones, including the Shenzhen Special Economic Zone, focused on ‘incentives' by adopting favorable income tax policies, customs and (value-added tax) breaks, the Shanghai FTZ is intended to be a testing ground for a largely free and open economy as measured by international standards," said Steven Zhang, managing director at New York-based Fund Tax Services LLC.
But Zhang, a Shanghai native, said the FTZ's tax policies will be "expected to be in line with the direction of overall tax reform in China and international practice.
"They will remain subject to study and adaptation, so as not to erode the tax base and to align with China's overall tax system for foreign investment," he said.
Norm Page, a partner at Davis Wright Tremaine LLP, a US business and litigation law firm, and chair of the firm's China practice in Shanghai, said that financial leasing companies will be encouraged to start up in the FTZ. That will include factoring activity (selling of accounts and collecting debt).
"China wants to help small and medium-sized enterprises (SMEs) get more access to financing. SMEs are the biggest source of job growth in both China and the US," said Page, who has lived in Shanghai for seven years.
In one major difference from China's other economic zones, which emphasize manufacturing, the Shanghai FTZ focuses more on the finance industry. That's an area that Chinese and Western economists have argued should be liberalized to boost the economy.
Banking regulators have already moved to allow 11 financial institutions, including the Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China), to set up branches in the zone.
The idea that these foreign banks can participate in equity and capital markets freely in the FTZ will mean more capital for the economy, which "also takes stress off the central bank", said Gutierrez.
"The next big opportunity is, in general terms, services — specifically financial services — and to open up financial services can be the next engine for economic growth for China," said Gutierrez, who served as vice-chairman of Citigroup Inc's institutional clients group.
Christopher Wells, a partner at Bingham McCutchen, a global law firm with offices in China, said that lifting some restrictions on financial services is just a very "modest" change.
"All financial markets that compete with Shanghai — Hong Kong, Singapore, Frankfurt, New York, London, Paris, Los Angeles, San Francisco and Sydney — already allow this and have allowed it for decades," he added.
The FTZ will create conditions to test yuan convertibility under the capital account, market-determined interest rates and international use of the Chinese currency within the FTZ. Citigroup is one of those institutions that plan to set up a branch in the zone.
Watershed moment
Gregory Chin, a professor of political economy at York University in Toronto, Canada and a former Canadian diplomat in , said the new policies in financial services for the zone mark "an important watershed moment" in Shanghai's efforts to build a greater role as a hub for onshore renminbi business as well as cross-border renminbi business.
"For a long time, especially since China entered the World Trade Organization, foreign banks and financial interests have wanted more room to operate inside the Chinese market, especially in the Shanghai area," said Chin.
"Foreign financial institutions see enormous business potential inside China, especially if they can expand into more areas of renminbi-based lending and other renminbi-denominated financial activities."
Sophii Weng, an economist with Standard Chartered Bank in New York, said the Shanghai FTZ is still in "conceptual territory", even with certain new policies in the banking sector. She said the blueprint for the banking sector lacks "details".
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歌曲榜Top10In Aspen, Robert Gates, Condoleezza Rice and Madeleine Albright dissect Russia crisis |
Karl Herchenroeder
Back to: August 8, 2014
Christina Capasso/The Aspen Times |
Nicholas Burns, left, moderates a discussion with Former Secretaries of State Madeleine Albright and Condoleezza Rice and former Secretary of Defense Robert Gates.
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Editor’s note: “Bringing It Home” runs weekends in The Aspen Times and focuses on state, national or international issues that have ties to or impacts on the Roaring Fork Valley.
Three former top-level U.S. officials agreed Friday that recent action by Russia has created the most acute East-West crisis since the end of the Cold War.
Former Secretary of Defense Robert Gates and former Secretaries of State Condoleezza Rice and Madeleine Albright, speaking at the Aspen Institute as part of the McCloskey Speaker Series, addressed foreign relations with Russia and how the U.S. should proceed.
Weighing the possibility that Russian President Vladimir Putin could remain in power until 2024, Gates said he has always defined diplomacy as “saying ‘nice doggy’ until you can find a rock.”
What the U.S. faces, Rice said, is a perfect storm between a leader who is unreconciled to the post-Cold War order in Europe — who is willing to use economic pressure, military force, intimidation and surrogates to undo that order — and an international community uncertain on how to respond.
“When great powers begin behaving badly, it gets really dangerous,” Rice said, noting the sophistication of the weapons that brought down a Malaysia Airlines commercial jet over Ukraine on July 17.
Gates said Putin is trying to upend two points of international order set at the Cold War’s conclusion. First he spoke of Russia’s annexation of Crimea, saying Putin is disregarding the agreement that border changes are resolved through peaceful negotiation. Second, Putin is ignoring the fact that sovereign nations have the freedom to choose their allies, he said.
“A matter settled at the end of the Cold War is now very much back on the table,” Gates said.
Gates said that in his view, Putin seems to be on a historical mission to protect the Russians left behind by the Soviet Union’s collapse. Through the creation of banded states on the periphery of Russia that lean toward Moscow economically and politically, Putin wants to create a buffer, Gates said. And Ukraine is the linchpin.
“He doesn’t want to re-create the Soviet Union, I don’t think,” Gates said. “He doesn’t want responsibility for all those economic basket cases.”
Albright argued that the Ukrainians want to follow Poland’ they want the same quality of life. They also want a rational economic relationship with Russia, she said, but the question is whether Putin can see past his zero-sum game. She said President Barack Obama is using limited foreign-policy tools in the best way possible, but she thinks Ukraine needs more assistance.
“I’d personally give them some lethal weapons, and I’d definitely strengthen (the North Atlantic Treaty Organization),” she said, adding that ultimately, it’s Ukraine’s next move.
Rice agreed, making the point that historically, operating over the heads of smaller nations never works out well. She said the U.S. also has to remember that Russia has coincident interests with the U.S. — in North Korea and Iran, for example. She argued that it’s important to maintain a relationship with Russia but not at the cost of making it seem more important than it is.
“It’s important to recognize that they have their own interests, and very often our interests will come together,” she said.
While posing the final question, moderator and former U.S. Ambassador Nicholas Burns pointed out that popular opinion in the U.S. tells us that the American public doesn’t want troops committed to another long-term conflict after Iraq and Afghanistan.
Albright said that worries her, as did Gates, who said cutting the defense budget sends a signal to the rest of the world.
“If you look at history, the times that America has turned inward, terrible things happen in the world,” Albright said.
Rice said it has been the hope that developing nations like India and Brazil would step up to the plate, but that’s not the case. Gates blamed America’s leaders for not persuading the public of the need for U.S. involvement, noting that wars have never been popular.
“What is missing, it seems to me, is the kind of persuasive leadership, not just from the president, but the leaders of both parties, particularly in Congress, that our leadership is still needed in the world,” he said. “Without that leadership, we are going to face far worse circumstances one day in the future.”
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