Reality Check: How is Shanghai Free Trade Zone Doing?

By Jieying Ding

China (Shanghai) Free Trade Zone, launched on September 29, 2013 with the support of the Chinese Premier, Li Keqiang, is the first free trade zone in China. It comprises four areas under the special administration of customs, and is located on a 29-square-kilometer patch of land on the outskirts of Shanghai. At its launch, it was thought to mark a major milestone in China’s commitment to economic reforms and continuous wide opening to world markets. It was supposed to attract foreign investment and introduce interest rate liberalization and easy cross border capital flow.

However, political power struggles shadowed over the free trade zone even before its launch. South China Morning Post, a Hong Kong newspaper that is believed to have close connections with Beijing, cited three sources with first-hand knowledge of high-level government meetings saying that Li Keqiang slammed his fist on the table in frustration when he was told about continuing opposition to the Shanghai free trade zone. Shortly before its launch, there was speculation that China would lift its ban on Facebook within the free trade zone, which was quickly denied by the state-run People’s Daily. Moreover, Li Keqiang and his deputy’s absence at the opening ceremony surprised a lot of people who had high expectations for the free trade zone.

At its one-year anniversary, several media outlets reported the performance of the free trade zone as “disappointing.” Although Shanghai free trade zone has simplified customs procedures, cut red tape for company registration, allowed yuan-dominated gold trading, and liberalized rules on company fund transfer, among others, that’s not enough to impress business executives and investors who once thought of the free trade zone as a symbol of Chinese economic reforms. Shortly after its launch, the Chinese government published a “negative list,” listing all the restrictions and prohibitions that foreign investment is not allowed to do within the free trade zone. This almost comprehensive negative list came as a disappointment to foreign investors, but they still held on to the hope that the list would be relaxed in the years to come. The good news is the 2014 negative list was 27 percent shorter than the 2013 negative list, and almost half of the restrictions removed were related to manufacturing and processing. However, although some restrictions on banks and currency brokers were relaxed, it remains unclear whether the removal of restrictions would be in effect as the list points out that investment in banking-style institutions will be subject to existing regulations. It is ironic that the most visible change in the zone is its cheap, directly imported seafood. Every day, you can see customers waiting in lines for those king crabs and tiger prawns, which are sold out within an hour after opening.

On a more positive note, many companies, including Amazon, have registered and opened small offices in the zone, hoping for future reforms. From the Chinese side, three other provinces, Tianjin, Guangdong, and Fujian, have been approved by the State Council to enjoy certain practices of the Shanghai free trade zone, demonstrating the Chinese government’s continued support for free trade zone.