27 March 2019
A man walks past a monument at the Shanghai free-trade zone. Photo: Bloomberg
A man walks past a monument at the Shanghai free-trade zone. Photo: Bloomberg

Don’t rush to replicate the Shanghai FTZ model

The Shanghai (China) Free Trade Zone (FTZ) hit the headlines again recently due to two developments.

One is that Shanghai’s deputy mayor Tu Guangshao said the zone will update the so-called negative list of industries where foreign investors are banned or limited. He said the list’s 190 special regulatory measures would be cut by a third.

The other development is that the zone will name the first institutions that can replicate its model nationwide in the fourth quarter.

“It is the very first task for the zone to roll out a string of new institutions and policies that can be applied in other parts of the nation,” Jian Danian, deputy director of the zone’s administrative body, told reporters on May 27 in Shanghai. He didn’t elaborate.

But the question is: what can the zone offer?

The zone, established on Sept. 30, 2013, is supposed to be a test field for the country to advance its stalled reform process in opening up the service sector.

One basic way to achieve that goal is to adopt international practice such as having a negative list and granting foreign companies pre-entry national treatment.

General speaking, the negative list is a ban list, which names areas and circumstances where foreign investors are barred. Those not listed are fully open for foreign investors, who can obtain pre-entry national treatment.

But China has been using a mixed list in its regulation of foreign investment. Its Catalogue of Industries for Guiding Foreign Investment lists three categories for foreign investors: industries where foreign investors are encouraged, or allowed, or limited and banned. In addition, foreign investors can gain national treatment only after they are approved to operate in China. This runs differently from the pre-entry national treatment adopted by other major economies.

China’s first negative list was born after the establishment of the Shanghai zone.

But the zone’s list turned out to be a joke, as it was merely a format change of the Catalogue of Industries for Guiding Foreign Investment. It appeared to be a hastily designed list.

Before the Shanghai zone embraces openness in earnest and cut its negative list aggressively, it doesn’t have much to teach others.

The Shanghai list has 190 bans, accounting for 17.8 percent of the industries. Among these measures, 38 ban foreign investment and 74 limit foreign investment. The list is too large when compared with its US counterpart. For example, the three US negative lists in the US-South Korean free trade agreement have fewer than 40 special regulatory measures.

Officials’ eagerness to replicate the so-called Shanghai model is apparently an attempt to politically declare the zone a success. It is also a move to herald more free trade zones in other parts of China.
But a rush to join the bandwagon will be meaningless if foundations are not built.

As for the negative list, there are at least three things to be done.

First, China needs to revise its laws governing industries, especially the service industry, to make them cater to the need of the negative list. Although the US doesn’t have a law about the negative list, restrictions on foreign investment are stipulated in various industrial laws and regulations, which provide a legal foundation to compile the negative list.

In China, the negative list actually contradicts with some of the existing legislations.

To solve the problem and pave way for a nationwide negative list, the country should start reviewing its economic legislations. Some laws against the spirit of negative list should be abolished or amended, while some industrial laws that have been long absent should be mapped out. Legislations should also be improved on national security checks of foreign investment. By doing these, the negative list can be built on sound legal framework.

Second, transparency and specifics must be improved for the negative list. Many items on the Shanghai list are too vague to be implemented. For example, the list restricts foreign investors from secondary real estate market and property agencies. But there are no specifics on the restrictions. Restrictions can be about stakeholding, business scope or anything else. Without articulation, the practicability is in question.

Third, service industry categorization should be revised in accordance with international practice. Now, major countries follow the World Trade Organization’s categorization but China uses its own. The difference adds to the difficulties of implementing the negative list.

So, if the Shanghai zone’s experience, if any, is supposed to be expanded nationwide, some fundamental changes must take place first.

– Contact us at [email protected]


Tu Guangshao, Shanghai’s vice mayor, has said the city’s free-trade zone will update the ‘negative list’ of industries barred for foreign investors.

The writer is an economic commentator. He writes mostly on business issues in Greater China.

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