The highly anticipated Shanghai Free Trade Zone (SFTZ) opened its doors on September 29, 2013. Officially named China (Shanghai) Pilot Free Trade Zone, it marks yet another step in China’s continuing efforts to reform. Although the specifics are not yet available, (and the government has stated that details will slowly drip to the public in the next three years), the pilot zone serves to liberalize China’s economy and perhaps kick start a broader reform agenda.  

Championed by the new Prime Minister, Li Ke Qiang, the SFTZ covers over eleven (11) square miles on the eastern outskirts of Shanghai’s commercial hub. The pilot zone was approved by China’s State Council on July 3rd of this year and was approved by the National People’s Congress on August 16. The zone is not meant to be a “free trade zone” per se; rather, it is a special enterprise zone with a long list of banned sectors in which foreigners cannot invest. However, sectors that are open to foreigners for investment in the SFTZ include: banking, health insurance, leasing, ocean shipping and management, value-added telecom services, sales and service of game machines, legal services, credit investigations, travel, investment management, construction, entertainment, educational and vocational training, and medical services. (See Shanghai Free Trade Zone, The Next Shenzhen? Economist, October 5, 2013; see also Shanghai’s New Free Trade Zone – General Plan and Regulations, China Briefing, Sept 28, 2013).

Though the full scale impact is not yet clear, benefits of doing business in the SFTA have already emerged.  For example, the filing process for companies registered in the SFTZ will be simplified. Minimum registered capital requirements are removed for some companies in the zone.  Typically a company is required to keep a minimum amount of registered capital, as specified by relevant laws and regulations.  A company is further required to make at least 20% of such registered capital within a few months upon receipt of its business license and the remainder within the period allowed by laws.  These requirements are waived for most companies in the SFTZ.  

The Chinese government is cautious in rolling out this new special enterprise zone and it will take time for it to blossom. There are only three dozen or so firms with permission to enter the zone at the moment and most of them are domestic. Citibank is one of the American giants with permission to enter the zone and its opportunities perhaps will come when the Yuan convertibility and interest rate liberalization eventually take place. Regardless of the lack of details and other problems, the pilot zone could mean more predictability in regulations for those with permission to enter the zone; and predictability in China is a good thing. Implementation of rule of law in China varies across regions and there are tremendous uncertainties for businesses; however, the management being put together for the SFTZ will be able to help coordinate different regulatory bodies and perhaps make doing business in China more transparent and predictable.

In addition, investors with permission to enter the zone will be able to by-pass both the Qualified Foreign Institutional Investor program and the Qualified Domestic Institutional Investor program and invest funds directly; however, it is not clear if there will be a quota restriction within the zone. Foreign banks within the zone will also be able to issue bonds in the domestic market and there will be an international oil future trading platform and foreign participants are encouraged. These will certainly help upgrade China’s commodities market.  

For more information on the zone and the “banned sectors” within the zone, please visit its website at: http://zbw.sh.gov.cn/WebViewPublic/homepage.aspx

Jin Kong