The reform blueprint released after the Chinese Communist Party’s recent central committee plenum has listed, among other things, accelerating the construction of free trade zones (FTZs) as a task in the nation’s opening-up endeavor. News reports, meanwhile, have said that many local governments, including those in Guangdong, Fujian, Shandong, Zhejiang, Jiangsu, Tianjin and Chongqing, had either applied, or are applying, to have FTZs similar to the one in Shanghai.
But given the recent developments of the Shanghai Free Trade Zone, it will be good to wait awhile before embarking on new FTZs.
Above all, financial deregulation to be carried out in the FTZ will likely widen the gap of interest rate and foreign exchange rate in and outside the zone, creating a hotbed for arbitrage and speculation. How to deal with this remains a challenge, and it is clear this will be an arduous task, as can be seen in the case of Hong Kong: Despite the firewall between Hong Kong and the mainland, capital speculation is rampant because of the rate differences.
So before the proper methods to control arbitrage are designed and tested in Shanghai, it is not appropriate to establish other FTZs.
There are also other problems.
For example, the divide among government agencies on FTZ remains huge. The Shanghai FTZ is backed by both Premier Li Keqiang and the Shanghai government. But many other central government agencies are conservative about it. Clearly, consensus has not been reached, as wrangling between pro-reform forces and interest groups continues.
This split is harmful as the development of the Shanghai FTZ requires practical support from various central departments. So it is important to clear the doubt of these departments and convince them that a free trade area is good for long-term benefit of the country and the regions.
But before the differences are narrowed, establishing more FTZs will only mean more troubles and disagreements.
In addition, time is also needed for the Shanghai FTZ to really make breakthroughs so that its practice and spirit can be copied elsewhere. But so far, no major breakthroughs have been made. A major point of criticism lies in its negative list, a hastily drafted category of industries and areas where foreign investors are banned or limited. Industries not listed are supposed to fully open for foreign investors with pre-entry national treatment.
Many have complained that the Shanghai list even places more restrictions on foreign investors than a nationally adopted catalogue that names the industries in which foreign companies are encouraged, limited or barred.
This means that real breakthroughs will take at least another year to come about when the negative list is updated. In this sense, the Shanghai FTZ is just starting to test waters by learning from the international practice.
Before Shanghai develops enough good experience for others to follow, there is indeed no reason to open more FTZs.
It is good not to rush to jump onto the FTZ bandwagon, also because local authorities’ understanding of FTZ is not mature enough.
A common thinking among the local leaders is that such zone is a policy boon instead of a reform pilot. After talking with some local officials, we have a feeling that they see the FTZs as a booster to GDP growth. Thus, they aim to initiate massive construction either by establishing a new FTZ or upgrade the existing bonded zones. With that, they hope economic growth will get a quick shot on the arm. They also believe that preferential policies will make businesses flock to the zones, helping polish local GDP figures.
It is true that deregulation and free policies are given in an FTZ, but this comes at a price for local governments. The price is that local authorities will have to cut their approval and administrative rights and totally change their governing philosophy and practice on businesses in terms of not only trade but also investment. If a government does not learn to act that way, the advantage of the FTZ cannot be brought to full play. In that case, the FTZ will just be a duplication of a bonded area.
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