The Ministry of Commerce of People’s Republic of China announced on
August 22, 2013 that the State Council officially approved establishing the
China (Shanghai) Pilot Free Trade Zone (known in short as the Free Trade Zone).
This Free Trade Zone was unveiled on September 29. It covers four districts of
28.78 square kilometers, composed of Waigaoqiao Bonded Area, Waigaoqiao Bonded
Logistics Zone, Yangshan Free Trade Port Area and Shanghai Pudong Airport
Comprehensive Bonded Area, all of which are under the administration of the
Custom’s special supervision.
Expert says the establishment of the Free Trade Zone is as significant
as that of the Shenzhen Special Economic Zone. It will speed up reform with
opening policies and bring about breakthroughs in investments in the service
industry. Also it is likely to help China participate in the regional market, such
as the Trans-Pacific Partnership (TPP). Considering local advantages and
specialties are much varied around China, Shanghai may set up an example of a
free trade zone to others in the future.
Free Trade Zone harvests
achievements and challenges
Generally, experts express their optimism that the establishment
of the Free Trade Zone will push forward Shanghai to become an international
shipping center. It is expected that Shanghai port will stand out and spur the
development of other ports along the coast of East China. But it creates a new challenge
to the port industry on how to use the right policies to further increase the
competitiveness of the port.
As the first de facto pilot zone to join the globalization with comprehensive
opening-up policies, the Free Trade Zone means more preferential and opening-up policies. How to deepen and implement these
policies is a pressing issue in need of an immediate solution.
The framework Plan for the China (Shanghai) Pilot Free Trade Zone
(in short, the Plan) makes it clear the need to improve the international
shipping service, which attracts most attention from the port industry. First,
the Plan wants to explore and form a new shipping development mechanism and
operational patterns of international competitiveness via the cooperation of
Shanghai Waigaoqiao Port Area, Yangshan Deep-Water Port Area and Pudong Airport
International Transportation Hub. Second, it requires the development of
industries such as shipping finance, international ship transportation,
international ship management and international shipping brokerage. The third need
is to speed up the development of freight index derivatives trading. The fourth
requirement is to promote Transit and Less Container Load businesses, allowing
non-five-star flag vessels owned or indirectly owned by Chinese-funded
companies to pilot the coastal container shipping between domestic coastal
ports and Shanghai port. The fifth demand is to support Pudong Airport to
increase transfer flights for international shipments, to utilize Shanghai’s
regional advantages and the preferential tax policy of Chinese-funded “Ship of
Flag of Convenience”, to promote eligible ships’ registration in Shanghai. The
seventh need is to implement international ship registration policy in the Free
Trade Zone, which has already been a pilot project in Tianjin. The eighth is to
simplify the procedure of issuing international shipment transportation
business licenses, for a new efficient ship registration mechanism.
In addition, innovation and opening-up in finance is another hot point
within the port industry. Experts say that financial reform is the biggest
challenge for the Free Trade Zone.
In the Plan, although not much detail explores the opening of a Renminbi
capital, it indicates that it is acceptable to try and pilot Renminbi capital
exchange projects in the Free Trade Zone under a controllable risk. Also, it is
acceptable to try and pilot the trans-border use of Renminbi. The Plan encourages
the exploration of the reform of international-oriented foreign currency
management and the building of a foreign currency management system suited to the
Free Trade Zone. In addition, the Plan suggests that eligible foreign financial
institutions would be allowed to set up foreign-invested banks, and Chinese-foreign
equity joint banks could be co-funded by Chinese private firms and foreign
financial institutions. And piloting the setting up of restricted license banks
in the Free Trade Zone at appropriate time is welcomed.
Offshore finance is an important part of the Free Trade Zone.
Shanghai should build an offshore financial market along with the establishment
of the Free Trade Zone. The Free Trade Zone will trial the risk management of
domestic commercial banks’ offshore business and improve the offshore business
mechanism. It is suggested eligible Chinese-funded banks should be allowed to
run offshore business.
In respect of enlarging the investment field, it is stated the
piloting of the Pre-Establishment National Treatment in the Free Trade Zone to
give full play to the fundamental role of the market in resource allocation.
The Free Trade Zone will take the lead in reforming in three respects:
investment project management, foreign investing firm establishment and
alteration administration, as well as industry and commerce registration.
Financial leasing companies or their project-based subsidiary companies
registered in the Free Trade Zone may be applicable to the pilot export tax
refund policies. The Plan suggests no minimum registered capital shall be
required for a project-based company (that is a single-ship/aircraft company)
set up by financial leasing companies in the Free Trade Zone and financial
leasing companies will be allowed to conduct commercial insurance related to
their primary businesses.
Meanwhile, the Plan suggests the overseas companies gradually be
allowed to engage in commodity futures trading, and overseas commodity futures
exchanges be allowed to assign or set up transaction warehouses. Once the
transaction warehouses are built, they will partly replace LME Warehouse in
Busan of South Korea and Singapore, reducing the trading cost for the domestic
But it is a shame that preferential tax policies are being
tightened up. No approval is given to that 15 percent enterprise income tax by
reference to technically advanced service industry applicable to eligible project-based
companies registered in the Free Trade Zone engaged in overseas equity
investment as it is to qualified firms engaged in offshore business.
Also, it is worth mentioning that the Free Trade Zone sets forth a
“Negative List” for the first time. This negative list can be seen as a “black list
in the investment field, classifying those administrative measures aimed at
foreign investors who fail to conform to National Treatment and
Most-Favored-Nation Treatment, or the restrictive managing measures, such as
performance requirements and executive requirements etc. The negative list is a
worldwide investment access system. Until now, more than 70 countries have
adopted the Pre-Establishment National Treatment or Negative List. “With the
dividend of the system innovation, we can stimulate the vitality of the market.
This is the biggest advantage of the reform and innovation this time,” said Dai
Haibo, deputy secretary-general of Shanghai Municipal Government and executive
deputy director of the Free Trade Zone Management Committee. He also said that
with innovation in policies, such as the negative list, classifying what doesn’t
meet the requirements will harden the confidence of foreign investors who want
to invest in China.
The Free Trade Zone brings
about new changes
Ever since the reform and opening-up policies were published in the
late 1970s, port logistics have been playing an important role in economic
development. To be a part of the entire logistics system and spur its
integrating and radiating function are the role of the ports. That is to say
that the ports should assume a leading position of international logistics and
their function is supposed to organize, coordinate and integrate logistics. This
matches up with the resources congested in the ports. However, along with the establishment
of the Free Trade Zone, can the ports meet the developing requirements in the
new environment？How do the ports undertake integrating and radiating effects?
To solve the problems above, we need to understand the possible new
changes brought about by the Free Trade Zone.
At the China Port and Shipping Development Forum & China
Ports, Shipping and Logistics Exhibition, Professor Wang Xuefeng, deputy
director of the International Shipping Department of Shanghai Maritime University,
explained as follows.
First of all, the structure of commodity types will be changed
from massive import and export of processing supplied materials to the increase
of high value-added products. International trading structures will also see changes,
which means that supplied material processing business may turn to transit trading;
Transit goods will increase, bringing in change in transportation structures.
Second, in respect of forms, the Free Trade Zone will promote the upgrading of
the current trading pattern, which is the transformation and upgrading of
trade. Such change, if completed, is both an opportunity and a challenge for
port logistics. The change will also give birth to new trading models and
types, such as bulk commodity trading and futures delivery.
Under the changes mentioned above, service targets of ports
logistics will also change accordingly to better serve the joint development
within the Free Trade Zone, the integrated trading development between the Free
Trade Zone and other regions at home and abroad, as well as the coordinated
development between the Free Trade Zone and the shipping industry clusters
As for how to seize opportunities raised by these changes, Prof
Wang calls for the port industry to keep seeking for chances to bring about new
development via innovations in technology, management, procedure and policy.
Opportunities have already opened up for the improvement of
international shipping services, which has attracted the industry’s focus. For
example, the development of Transit and Less Container Load businesses will be
further promoted; non-five-star flag vessels owned or indirectly owned by
Chinese-funded companies are allowed to pilot the coastal container shipping
between domestic coastal ports and Shanghai port.
Transit and LCL business is always a hidden scar for Chinese
ports. At present, international shipping transit in Asia largely relies on the
traditional container terminal ports in Singapore and Busan in South Korea,
etc. In the Chinese mainland, the ports are weak in terms of competitiveness in
international transit. Now, the Plan is expected to accelerate the Transit and
LCL businesses at the initial stage. Meanwhile, new functions of Shanghai port
are expected to be improved, paving the way for Shanghai to be an international
shipping center. At present, the Free Trade Zone’s administration committee
proposes speeding up the planning of the Yangshan Islands International Transit
and LCL Center, and to realize paperless customs declarations and bulk cargo
landing as soon as possible, in the hope of achieving the goal of large-scale
operations in international Transit and LCL businesses.
Port officials say that the Transit and LCL businesses in the plan
of the Free Trade Zone aim at “non-five-star flag vessels owned or indirectly
owned by Chinese-funded companies”. Therefore foreign shipping companies are
not allowed to conduct coastal container shipping businesses between Chinese
domestic coastal ports. If the policy of container shipping between coastal
ports can be adjusted to suit the foreign companies, then, Shanghai will
attract at least 80 per cent to 90 per cent of the total transit containers
shipped from the Bohai Gulf to Busan Port — a considerable quantity.
Since the Free Trade Zone was approved by the State Council,
second-tier cities, like Chongqing, Tianjin, Zhoushan and Xiamen, are
experiencing an enormous urge to set up free trade zones. The applications are being
filed in one after another. Some sources indicate that the next free trade zone
will be established in Tianjin, while others say that Shanghai, Tianjin, Xiamen
and Nansha will be four “golden flowers” with free trade zones in the future.
No matter how things are going, Shanghai has already stood as an experimental
field of reform and opening-up the economy. Opportunity is right ahead. As to
how to seize it, let’s wait and see.