AmCham Shanghai Hosts Perspectives on the FTZ

 

 

AmCham Shanghai Hosts Perspectives on the China (Shanghai) Pilot Free Trade Zone

On October 29, AmCham Shanghai hosted the first in what will become a series of events centered around the Shanghai Pilot Free Trade Zone (FTZ) entitled, Perspectives on the China (Shanghai) Free Trade Zone. AmCham Shanghai President Kenneth Jarrett opened the event and noted that based on the attendance of more than 300 people, the demand and interest in information related to the FTZ is extremely high. The FTZ, Jarrett noted, is part of the ongoing reforms Shanghai is pursuing to become an International Financial Center by 2020.

Three distinguished speakers provided their perspectives on the FTZ: Dr. Brice Yong Zhang, the Deputy Director General of the Financial Services Bureau in the Pudong New Area; Dr. Shao Yu, the Chief Economist and Chief Strategist for the Orient Securities Company; and Andrew Au, CEO of Citi China. A question and answer period followed the presentations and was moderated by Robert Theleen, the Chair of AmCham Shanghai and President and CEO of ChinaVest.

The three speakers shared their thoughts on the Shanghai FTZ and what it meant not only for China, but for international companies that will look to operate there and future negotiations for China regarding the Bilateral Investment Treaty (BIT) with the United States and the Trans-Pacific Partnership (TPP). The internationalization of the Chinese Renminbi (RMB) was a major topic discussed during the event and was viewed as particularly important given that currently so little of China’s international trade is settled using RMB. The speakers noted that allowing the flow of the RMB in the offshore market back into the onshore market will be a key piece of the FTZ and broader financial reforms.

The speakers noted that the move to a ‘negative list’ approach was a major step for the Chinese government. In the past, China has used what is called a positive list and a Foreign Investment Catalog to limit foreign investment to defined sectors and industries. If an industry did not appear on the list, then it was forbidden for investment by foreign firms. However, with the move to a negative list, if an industry does not appear on the list, it is open to foreign investment. Although there have been questions due to the length of the current negative list, the speakers agreed that the list can, and likely will, be revised in the months and years ahead. However, they viewed the move to the negative list, on the whole, as a positive development.

The speakers noted that while there are some similarities in the watershed changes that are occurring now and those that occurred with the launch of the first Special Economic Zone (SEZ) in Shenzhen in 1979, the driver for this stage of reform is largely to develop China’s services sector. Shanghai is hoping to reach a five year target for the services sector to account for 65 percent of GDP, and the FTZ is a key mechanism to help Shanghai achieve this goal. Speakers also noted that Shanghai’s attempts at becoming an international financial center will not need to be at the expense of Hong Kong, and that the goal of the FTZ is to increase the size of the financial services sector in China, not take it away from Hong Kong. Speakers noted the potential for specialized focus areas for the two cities – Hong Kong for wealth management and Shanghai for the onshore RMB market. Ultimately, they said, the Chinese and the global economy are big enough to have more than one financial center in China.

Other opportunities that will certainly exist in the FTZ for international firms, according to the speakers, were for global audit and accounting firms; shipping and logistics firms; and financial firms that will be able to take advantage of interest rate liberalization and other financial reforms by providing various financial products.  Currently, only 40 percent of firms listed on the Shanghai Stock Exchange are audited by accounting firms to international standards. The speakers agreed that Shanghai is the perfect choice for the location of the FTZ given the already existing financial services sector and the presence of so many international company global and regional headquarters. Indeed, the FTZ could potentially further support existing MNC headquarters by providing conditions suitable for the housing of their treasury centers.

Ultimately, the speakers believed that the FTZ will provide tremendous opportunities for both domestic Chinese firms – who are particularly excited about the additional financial sector access and access to new channels for funding – and American firms. They noted that the process will not be completely smooth and that bumps in the road will occur; though their outlook at this point is very positive. However, the biggest advantage, according to the speakers, was that Shanghai-based firms that have taken part in the FTZ will be the best prepared to expand into the rest of the China market when these reforms move beyond the boundaries of the FTZ.