22 March 2019
Many foreign banks complain of vague rules and policies at the Shanghai Free Trade Zone. Photo: Bloomberg
Many foreign banks complain of vague rules and policies at the Shanghai Free Trade Zone. Photo: Bloomberg

Shanghai FTZ fails to live up to reform promises, poll says

One and a half years after it was established, the Shanghai free trade zone has yet to fulfill its promise as a testing ground for China’s financial reforms, according to a poll of foreign banks.

More than 80 percent, or 31 of the 38 foreign banks that participated in a survey conducted by accounting firm Ernst & Young, said the free trade zone has not met their expectations as rules and other details remained vague.

“At present, they are not sure what kinds of products they can introduce in the free trade zone. It’s difficult for them to predict the revenue,” said Jack Chan, managing partner of financial services at EY Greater China.

Chan also said that the requirement for independent auditing, which adds a huge cost to companies seeking to establish a presence in the zone, has discouraged foreign banks. “Some smaller banks may think twice before entering it,” he said.

The survey, conducted in August and September last year, polled chief executives and senior executives of 41 locally-incorporated foreign banks and branches.

It showed that 23 foreign banks have registered in the FTZ while the others are either sitting on the fence or have decided against operating inside the zone.

As the free trade zone is only a test field and the model will be replicated nationwide, smaller banks do not feel they need to rush to enter the Shanghai FTZ, Chan said.

Established on Sept. 30, 2013, the Shanghai FTZ is intended to be an experimental field for the country to advance its stalled reform process to open up the financial sector and internationalize the renminbi. The zone currently occupies 28.78 square kilometers of the city’s Pudong New Area.

State-run Xinhua News Agency reported last month that the State Council had submitted a proposal to the National People’s Congress for the establishment of free trade zones in Guangdong, Tianjin and Fujian provinces.

In the survey, many of the respondents said they find the market challenging and complicated by issues surrounding financial reform and economic uncertainty.

The most difficult regulatory challenge in 2014 was access to the bond market, followed by the myriad of rules and regulations, and capital and liquidity constraints, Chan said.

Bank executives have also placed “remove foreign debt quotas”, “remove foreign guarantee quotas” and “better coordination among regulators” at the top of their wish list of regulatory reforms.

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EJ Insight reporter

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