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Where Is the Alchemy? The Experiment of the Shanghai Free Trade Zone in Freeing the Foreign Investment Regime in China

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Abstract

The establishment of the Shanghai Pilot Free Trade Zone immediately hit international and domestic headlines. On face value, the free trade zone is a variation to the long-established special economic zones set up by the Chinese government more than three decades ago in order to attract foreign direct investment and promote economic development in China. In substance, the free trade zone is used by China’s new leadership as a more ambitious testing ground for more liberal economic reforms, especially in the financial industry. This article looks not only into these deepening economic reforms but also into the inherent political difficulties and significance of implementing these plans from a law and development perspective.

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Notes

  1. Justice Feetham quoted in Bruce (1932), at p 141.

  2. See also Ji (2003).

  3. Currently, Shanghai has three bonded areas: Yangshan bonded port area, Waigaoqiao bonded area and Pudong Airport bonded area. The total volume of these three areas was US$100 billion in 2012. See A Yan and E Yiu, ‘Shanghai plans Free-Trade Zone’, South China Morning Post, 28 January 2013.

  4. Art. 2 (Application Scope), Procedures for the Administration of the China (Shanghai) Pilot Free Trade Zone [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu Guanli Banfa 中国(上海)自由贸易试验区管理办法], promulgated by Decree No. 7 of the Shanghai Municipal People’s Government on 29 September 2013 (hereinafter Admin SPFTZ).

  5. R Yao and S Elsinga, ‘China Announces Three New Free Trade Zones in Tianjin, Guangdong and Fujian’, China Briefing, 25 December 2014, available at http://www.china-briefing.com/news/2014/12/25/china-announces-three-new-ftzs.html#sthash.Xarvq2dr.dpuf.

  6. Justice Feetham quoted in Bruce (1932), at p 141. See Art. 19 (Financial Innovation), Admin SPFTZ.

  7. Deyo (1987).

  8. Crane (1990).

  9. G Chen, ‘Shanghai Vice Mayor Ai Baojun to head up Free-Trade Zone later this month’, South China Morning Post, 3 September 2013. See also S Rabinovitch, ‘Shanghai Free Trade Zone attracts 1,400 companies’, Financial Times, 28 November 2013.

  10. Take Qingdao as an example. Being one of 14 coastal cities, Qingdao was chosen as an experimental site for the tax-sharing reform in 1992. Qingdao was allowed to retain half of the indirect taxes, such as product, value-added, business and industrial-commercial taxes, which constituted 90 % of its total tax intake. Qingdao’s budgetary revenues grew by 59 % from RMB 1823 million in 1993 to RMB 2900 million in 1995. See Qingdao Statistical Yearbook (1995), at p 235.

  11. Solinger (1996).

  12. Peereboom (2005).

  13. Liu and Halliday (2009).

  14. J Cai, ‘Ex-central bank official wary of interest-rate deregulation’, South China Morning Post, 15 September 2013.

  15. Art. 4 (Administrative Body), Admin SPFTZ; ‘Shanghai Free Trade Zone: the next Shenzhen?’, The Economist, 5 October 2013.

  16. Deng (1994); Ding (1986).

  17. Naughton (1996), at p 302.

  18. ‘China’s currency controls: zone of contention’, The Economist, 7 December 2013.

  19. See also Pargendler (2012), at pp 2944, 2947; Clarke (2003), at p 495.

  20. Zheng (2004), at p 191.

  21. Lichtenstein (2003), at p 289.

  22. Art. 24 (Financial Body Development), Admin SPFTZ.

  23. K Li, ‘HSBC and BEA approved to operate in Shanghai Free-Trade Zone’, South China Morning Post, 13 October 2013.

  24. Agence France-Presse, ‘HKMA chief warns against complacency over Shanghai trade zone’, South China Morning Post, 6 September 2013.

  25. Art. 10 (Service Industry Expansion), Admin SPFTZ.

  26. Art. 22 (RMB Cross-Border Use), Admin SPFTZ.

  27. Art. 12 (Overseas Investment Filing System), Admin SPFTZ.

  28. Jiefang Daily [解放日报], 29 April 2014, p 9.

  29. D Ren, ‘Shanghai liberalises offshore yuan borrowing in Free-Trade Zone’, South China Morning Post, 22 February 2014.

  30. Art. 20 (Capital Account Convertibility), Admin SPFTZ.

  31. G Chen, ‘Shanghai to lead on yuan reform’, South China Morning Post, 6 September 2013.

  32. Convertibility under the capital account does not equate to full convertibility under the capital account. The purpose of opening up capital account operations directly serves real economic growth instead of finance for finance’s sake.

  33. Art. 21 (Market-oriented Interest Rate), Admin SPFTZ.

  34. Art. 25 (Risk Prevention), Admin SPFTZ.

  35. These markets enable small businesses that do not meet the Shanghai and Shenzhen stock exchanges’ listing requirements to raise capital.

  36. T Sugawara, ‘Shanghai OTC exchange creates market for high-tech stocks’, Asian Review, 25 March 2015, available at http://asia.nikkei.com/Markets/Equities/Shanghai-OTC-exchange-creates-market-for-high-tech-stocks (last accessed 27 March 2015).

  37. Apart from the Shanghai Equity Exchange, China already has a three-tiered share trading system at the Shanghai and Shenzhen Stock Exchanges. These are the main board for large companies, the SME board for small and medium-sized enterprises and the second board, or ChiNext, for start-ups.

  38. Currently, there are about 300 local exchanges trading all kinds of asset ownership in China. Beijing, Tianjin and Chongqing all have their own exchanges for unlisted securities. These exchanges are used as ‘third boards’, like the Nasdaq market in the US. However, different from the OTC boards in the US, market makers that quote both buy and sell prices in financial instruments for the purpose of making a profit on the bid-offer spread are banned from TOC markets in China. The central government, through the CSRC, is planning to launch a uniformly regulated OTC market in order to clean up the market. See generally, ‘China decides to expand OTC stock market nationwide’, Wall Street Journal, 14 December 2013, available at http://www.wsj.com/articles/SB10001424052702303293604579257643954696578 (last accessed 27 March 2015).

  39. D Ren, ‘Foreign firms shun Shanghai zone’, South China Morning Post, 29 November 2013.

  40. G Chen, ‘Xi Jinping’s visit to Shanghai zone gives new hope to economic reform’, South China Morning Post, 26 May 2014.

  41. Crane (1990); Pak (1997); Sun (1997).

  42. Sixth Five-Year Plan of the People’s Republic of China for Economic and Social Development (1981-1985) 1984.

  43. Fewsmith (1986); Crane (1990); Howell (1994), Ch. 4.

  44. Krugman (1991).

  45. This zone includes Guangzhou, Panyu, Shenzhen, Zhuhai, Huizhou, Dongguan, Zhongshan, Jiangmen, Foshan, Nanhai and Shunde. See Chan (1996), at pp 1–3.

  46. Cheng (1993), at pp 2–3.

  47. Shirk (1985).

  48. Qian and Stiglitz (1996).

  49. Tax treatments are four-fold: the exemption of duties on imports of advanced technologies and equipment for plant renovation (50 % taxes have been levied since 1994); the granting of authority to establish ‘development zones’ where enterprises are allowed ‘two year tax exemption and three year tax reduction’, as well as a 15 % enterprise tax rate (as opposed to the usual 33–55 %) after the initial five years; the provision of approval authority for FIEs up to US$5 million in the early years and later of up to US$30 million; and the authority to approve both in- and out-bound international business delegations without having to go through the provincial authorities. There are two special tax incentives for economic and technological development zones: the standard tax rate for FIEs in the zone is 15 % instead of 33 % and real estate taxes for FIEs in the zone are exempted for the first three years. In addition, the zone’s approval ceiling for FIEs is US$30 million, the same as that for the provincial government.

  50. Yang (1990); Yang (1997), at pp 7–9.

  51. Art. 3 (Regional Functions), Admin SPFTZ.

  52. See also Liou (1998), at p 144.

  53. Luo and Howe (1993).

  54. Seventh Five-Year Plan of the People’s Republic of China for Economic and Social Development (1986-1990) 1996.

  55. Friedman (1972).

  56. Goodman (2004).

  57. Holbig (2004).

  58. Ngok (2011).

  59. G Chen, ‘Have free trade zones become a victim of power struggle in China?’, South China Morning Post, 27 January 2014.

  60. Krugman (1991); Soo Kim (1995).

  61. World Bank (1992) Export processing zones. Policy and Research Series Paper 20, Industrial and Energy Department.

  62. Art. 16 (Shipping Hub Function), Admin SPFTZ.

  63. Art. 17 (Innovation in Entry/Exit Supervision System), Admin SPFTZ.

  64. Art. 18 (Entry/Exit Supervision Service Facilitation), Admin SPFTZ.

  65. J Anderlini, ‘Chinese GDP growth lowest in 24 years’, Financial Times, 20 January 2015.

  66. Art. 15 (Trade Transformation and Upgrading), Admin SPFTZ. G Chen, ‘Shanghai Free-Trade Zone may just be the start of something bigger’, South China Morning Post, 4 September 2013.

  67. T Mitchell, ‘China ends ban on foreign game consoles’, Financial Times, 7 January 2014.

  68. Currently, the e-commerce sector is dominated by Alibaba.

  69. Luxury goods are now sold on the mainland at a premium of up to 40 % over the price in Europe.

  70. D Ren, ‘Shanghai Free-Trade Zone spurs China Eastern’s plans’, South China Morning Post, 12 September 2013.

  71. According to McKinsey, China will account for a third of the US$175 billion global luxury market by 2015.

  72. See Art. IV, GATS.

  73. Macintosh (2005), at pp 282–283.

  74. G Chen, ‘China to lift ban on Facebook—but only within Shanghai Free-Trade Zone’, South China Morning Post, 29 September 2013.

  75. Some measures and incentives offered by the special economic zones, such as exemptions from duties and taxes on goods exported from these zones, are consistent with the WTO rules. See Torres (2007). One policy measure that was widely expected to be adopted in the SPFTZ was the application of a preferential 15 % enterprise income tax rate. Eventually, this policy did not materialise. The SPFTZ General Plan offers a variety of preferential tax policies, e.g., companies and individuals injecting non-monetary assets as capital income companies are able to average the premium arising from the asset appreciation over five years for income tax purposes. Tax exemptions are granted to manufacturing companies registered in the SPFTZ regarding their importation of machinery and manufacturing equipment. The export VAT refund is offered to financial leasing companies. These preferential tax treatments are more favourable than those that China promised in its WTO accession agreement.

  76. China Market Intelligence (2007), China’s 2007 Foreign Investment Guide, available at http://www.chinabusinessreview.com/public/c0801/cmi.html (last accessed 26 March 2015).

  77. Office of the United States Trade Representative (2005) Report to Congress on China’s WTO compliance, at p 6, available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/asset_upload_file293_8580.pdf (last accessed 26 March 2015).

  78. The US-China Business Council (2007) Administrative licensing and business approvals, USCBC 2007 member priorities survey executive summary: US companies’ China outlook: continuing optimism tempered by operating challenges, protectionist threats, available at http://www.uschina.org/public/documents/2007/10/uscbc-member-survey-2007.pdf (last accessed 26 March 2015).

  79. Zhao and Ou (2014).

  80. Special Administrative Measures on the Entry of Foreign Investment into China (Shanghai) Free Trade Zone (2013 Negative List) [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu Waishang Touzi Zhunru Tebie Guanli Cuoshi (Fumian Qingdan 2013) 中国(上海)自由贸易试验区外商投资准入特别管理措施(负面清单2013)].

  81. Jiefang Daily, 1 July 2014, p 5.

  82. J Anderlini, ‘New China free trade zones to lift growth’, Financial Times, 14 December 2014 (online).

  83. Chapter 12, P-4, available at http://www.fta.gov.sg/fta_tpfta.asp?hl=12 (last accessed 26 March 2015).

  84. UNCTAD, World Investment Report 2014: Investing in the SDGs: an action plan, available at http://unctad.org/en/publicationslibrary/wir2014_en.pdf (last accessed 26 March 2015).

  85. Chapter 12, P-4 (the Trans-Pacific Strategic Economic Partnership Agreement concluded by Chile, New Zealand, Singapore and Brunei in 2005), available at http://www.fta.gov.sg/fta_tpfta.asp?hl=12 (last accessed 26 March 2015). The negative list is usually used to safeguard ‘sensitive’ domestic industries. See also Weerakoon (2001).

  86. See Special Administrative Measures (Negative List) on Foreign Investment Access to the China (Shanghai) Pilot Free Trade Zone (2013) [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu Waishang Touzi Zhunru Tebie Guanli Cuoshi (Fumian Qingdan 2013)中国(上海)自由贸易试验区外商投资准入特别管理措施(负面清单2013)]. See also Art. 11 (Negative List Management Model), Admin SPFTZ.

  87. JT Areddy, ‘Name game in Shanghai trade zone’, The Wall Street Journal, 12 December 2013, A11.

  88. ‘China loses its allure’, The Economist, 25 January 2014, p 9.

  89. J Anderlini, ‘China: over borrowed and overbuilt’, Financial Times, 30 January 2015.

  90. C Giles, ‘Davos 2015: China to avoid hard landing with “entrepreneurship”’, Financial Times, 22 January 2015.

  91. ‘Foreign firms in China: you’re still welcome’, The Economist, 24 January 2015.

  92. Malaysia’s Labuan Island is also a distinct geographical zone with monetary policies separate from the rest of the country.

  93. S Rabinovitch and S Cookson, ‘China unlikely to impose “big bang” reforms’, Financial Times, 24 February 2012, p 3.

  94. D Ren, ‘Beijing reassures Hong Kong on Shanghai Free-Trade Zone’, South China Morning Post, 30 September 2013.

  95. Ibid.

  96. Ministry of Commerce, People’s Republic of China, ‘China to free deposit rates within two years’, 11 March 2014, available at http://english.mofcom.gov.cn/article/zt_npcandcppcc2014/news/201403/20140300514985.shtml (last accessed 26 March 2015).

  97. G Wildau, ‘Shanghai hints at easing of capital controls in Free-Trade zone’, Financial Times, 26 September 2014 (online).

  98. ‘The red and the green: the Chinese yuan’s relentless ascent to international status is a perilous undertaking’, The Economist, 26 April 2014.

  99. Implementing Rules for the Macro Prudential Administration of Offshore Financing Under Separate Accounting Monitoring Business Offshore Accounting and Cross-border Fund Flows in China (Shanghai) Pilot Free Trade Zone (Trial), 12 February 2015 [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu Fenzhang Hesuan Yewu J ingwai Rongziyu Kuajing Zijin Liudong Hongguan Shenshen Guanli Shishi Xize (Shixing)]

  100. Wildau, supra n. 97.

  101. S Rabinovitch, ‘Banks cautious on Shanghai Free-Trade Zone’, Financial Times, 30 September 2013.

  102. G Chen and J Yu, ‘Foreign banks shun China’s Shanghai Free-Trade Zone amid uncertain rules’, South China Morning Post, 10 October 2013.

  103. The Economist, supra n. 98.

  104. Framework Plan for the China (Shanghai) Pilot Free Trade Zone [Zhongguo (Shanghai) Ziyou Maoyi Shiyanqu Zongti Fang’an 中国(上海)自由贸易试验区总体方案], available at http://en.shftz.gov.cn/FrameworkPlan.html (last accessed 26 March 2015).

  105. Lardy (2012).

  106. Art. 3 (Regional Functions), Admin SPFTZ.

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Authors and Affiliations

  1. Shanghai Jiao Tong University KoGuan Law School, Shanghai, China

    Wei Shen (KoGuan Chair Professor of Law, Attorney-at-Law,) & Matthias Vanhullebusch (Assistant Professor of Law)

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  1. Wei Shen
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  2. Matthias Vanhullebusch
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Correspondence to Wei Shen.

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W. Shen: KoGuan Chair Professor of Law (PhD, LSE), Attorney-at-Law, New York, USA.

M. Vanhullebusch: Assistant Professor of Law (PhD, SOAS).

Appendix

Appendix

Table 1 Financial Liberalisation Rules and Regulations in the SPFTZ
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Shen, W., Vanhullebusch, M. Where Is the Alchemy? The Experiment of the Shanghai Free Trade Zone in Freeing the Foreign Investment Regime in China. Eur Bus Org Law Rev 16, 321–352 (2015). https://doi.org/10.1007/s40804-015-0008-9

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