China: selling the dream

Shanghai free trade zone frenzy shows  the country needs  to offer little to keep the money rolling in

Groffman

The news that Shanghai is setting up a free trade zone (FTZ) has excited analysts since its announcement in July. Nearly three months later the authorities released the plan to the public. They were cutting it fine. The zone opened for business just two days later, on 29 September. Many wonder if the FTZ can help Shanghai compete with Hong Kong as an international
finance centre. 

The fact it took so long to release the plan is significant. Leaks ensured that newspapers kept speculating about the FTZ. For example, a South China Morning Post journalist was told that China’s usual censorship of the internet will not apply in the FTZ. He duly printed the story, leading other newspapers to conclude that China as a whole is relaxing restrictions. Neither of these lines turned out to be true. 

And now we can read the plan. Its preamble is grandiose, invoking the Communist Party creed. It covers many of the aspects of financial
deregulation that so excite banking types: looser capital account controls, RMB in capital accounts to be freely convertible, market-oriented interest and foreign exchange rates, and support for branches of foreign-invested banks. But much of this is to be brought in slowly.

As well as the State Council’s stated aim of making Shanghai an international finance centre, one purpose of the FTZ seems to be to develop Shanghai and Pudong in general. But the zone only covers 11 square miles, about the size of Southwark. It covers Pudong airport, Yangshan port, and Waigaoqiao, but those areas are nowhere near Shanghai’s existing fin-ancial district and are not even adjacent to each other.

“Our government is being too cautious,” says an elderly Shanghai official who asks not to be named. “If they want to develop financial services they should build on the existing sector [in Lujiazui]. If they want to develop Pudong, then the plan needs to cover all of Pudong.”

Other changes include a simpler procedure for foreign companies establishing subsidiaries and the opening of certain sectors to foreign investment, including wholly-owned hospitals. For us lawyers, there are to be new “co-operative modes” for PRC and international law firms. There is no proposal to relax rules for international law firms, while domestic ones will still be subject to tight Party control.

But back to Shanghai’s ability to compete with Hong Kong. This is nothing to do with free trade zones. Hong Kong is successful because, among other things, it has the rule of law; it has due process and accountability; it has a free press; it has uncensored arts. Small government-sponsored economic zones are not enough to rival this.

China has never needed to offer benefits to attract foreign investment and again this is so with the Shanghai FTZ. Even before details were known the money started flowing. The stock price of the Waigaoqiao Development Company rose and nearby property values soared. Perhaps it’s enough for China to
announce it has a plan, whatever that plan is. Investment – and more economic success – will follow.