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Spotlight on..

The Shanghai Free Trade Zone

- ushering in a new phase in Chinas market economy
October 2013, Volume 1

The new Free Trade Zone (FTZ) which was officially opened on September 29 has been hailed by commentators as a milestone and a harbinger of new market reforms in China. The FTZ is still a work in progress, and although it is not yet clear what the specific policies for companies may be, it does indeed seem to have strong support from both central and local authorities. For these reasons, and given the possible business opportunities as well as the overall ramifications for the Chinese business environment, we feel that Multinational Corporations (MNCs) in China should pay close attention. MSLGROUP Public Affairs colleagues meet regularly with senior officials in both Shanghai and Beijing. We have decided to include the FTZ in our ongoing discussion topics with officials, as well as distributing a specific update to our clients on a regular basis to provide our insiders perspective on the latest developments of the FTZ.

Expected opening-up of the service sector in Shanghai FTZ

Sector Finance Measures Allow set-up of foreign wholly-owned banks, joint-venture banks by private and/or restricted licence banks Allow set-up of foreign medical insurance companies and investment companies Allow foreign exchanges to set up warehouses for settlement of commodity futures Remove the capital limit for leasing companies to set up ship and aircraft financing vehicles Shipping Loosen the shareholding limits for foreign shipping companies Allow all ships owned by domestic shipping companies to carry containers between ports in China Allow leasing companies to conduct factoring business Allow foreign bids for third-party payment licences Allow production and sales of gaming consoles Allow set-up of foreign healthcare institutions
Source: Caixin, SG Cross Asset Research/Economics

Trade service Business service Entertainment Social service

Shanghai FTZCrossing the river feeling for stones

According to information released by the authorities to date, the Shanghai FTZ will be the first free-trade zone in mainland China where goods can be imported, processed and re-exported without intervention of customs authorities. But many people believe that the political significance of the FTZ is greater: a geographically limited experiment with reforms that the central government would thereafter like to roll out all over the country, similar to Deng Xiaopings famous crossing the river while feeling for stones strategy used to justify the Shenzhen Special Economic Zone experiment in the 1980s. The concept of the Free Trade Zone was first launched in 2003 by Shanghai Mayor Chen Liangyu. The official mission of the FTZ is to elevate Shanghai into a global financial hub and free port, encouraging financial product innovation, increasing economic activity during the Three tier supervision of the Zone. slowdown and supporting economic reform and 1st level supervision restructuring. With the support of Premier Li Central Directly government report to Keqiang, the FTZ was officially approved on August 22 this year, and launched a month later on 2st level supervision September 29. The FTZ Shanghai municipal Shanghai Free government combines the following Trade Zone original zones into a single, new entity, covering 29 square kilometers: 3 level supervision Yangshan Free Trade Port Shanghai Free Trade Area, Shanghai Waigaoqiao Zone Administration Free Trade Zone (including Shanghai Waigaoqiao Bonded Logistics Zone), and Shanghai Pudong Airport Free Trade Zone. If successful, the FTZ will likely expand to cover the entire Pudong district.

Led by Vice Premier of the State Council Composed of state level departments, i.e. MOFCOM, NDRC, etc.

Composed of municipal level departments

Led Deputy Mayor of Shanghai Developed on the base of the Shanghai Free Trade Zones Administration

The Negative List a positive development

One of the most encouraging official announcements to date says that the Free Trade Zone will turn on its head the traditional approach to regulation of investment in China, in which an area of business is understood to be prohibited unless it has been explicitly allowed: in the FTZ, all businesses that are not explicitly prohibited and listed Negative List sectors on a negative list will be allowed. Agriculture, forest and fisheries Culture, sports, recreation A document released on Academic research and September 29 mentions that Renting and business services tech.services the list still covers 1,069 sectors across 19 broad categories of Real Estate Finance industry and contains 190 special regulatory measures; ICT areas where foreign Education investments are banned include internet cafes, lotteries, news Public infrastructure Retail and wholesale organizations and social survey research. Other areas are Sanitary allowed but face restrictions such as a ceiling on equity percentages: these include insurance, e-commerce and the production of batteries for alternative-energy cars. However, the explicit list is still an improvement on practices elsewhere, and according to Dai Haibo, Deputy Director of the FTZ's Management Committee, the list is going to be revised and updated every year or two.

Injecting an element of real capitalism

In our opinion, based on discussions with officials and business people around China, the FTZ will most likely bring significant opportunities for business in Shanghai, through a more relaxed regulatory system as well as a more commercial atmosphere and better investment environment. In the words of one prominent finance and economics media publisher that we talked to, the Shanghai FTZ will bring significant elements of "real capitalism" to China. In a conversation with another official working at the Shanghai FTZ, he expressed assurance that if this testing zone proves to be successful, it will be quickly expanded to cover the whole of Pudong District. In the longer run, successful policies will probably be adopted nationwide.

A good time for MNCs to get involved

Thanks to the strong potential combined with an initial lack of detailed implementation policy framework, the Shanghai FTZ presents an opportunity to engage with relevant stakeholders: MNCs can provide policy suggestions, share best practices from other markets, and ultimately help shape the direction of the upcoming policies and regulation. Our conversations with senior officials at FTZ responsible for drafting regulations and implementation procedures indicate that they are open to suggestions from foreign and local business leaders indeed, they see this as a key to the success of the FTZ.

For any inquiries please contact MSLGROUPs Lusha Niu, Director of Public Affairs, China lusha.niu@mslgroup.com Tel: +86-21-5169 9311 ext. 6308 or +86-139 1062 8855.
MSLGROUP is PublicisGroupes flagship strategic communications and engagement consultancy with over 3,400 professionals in over 100 offices in 22 markets. In Asia, MSLGROUP has the largest footprint in Greater China (16 offices and 800+ professionals) and India (16 offices and 550 professionals) as well as Asia as a whole, and is actively working to lead the development of the industry with the regular publication of whitepapers/reports and innovative Learning & People Development programs to nurture talents. MSLGROUP in Asia includes 35 owned offices and over 1,600 colleagues in Beijing, Shanghai, Guangzhou, Chengdu, Hong Kong, Macau, Taipei, Tokyo, Kuala Lumpur, Seoul, Singapore, Mumbai, Delhi, Ahmedabad, Pune, Bangalore, Chennai, Hyderabad and Kolkata. An activation network of colleagues reaches an additional 125 Indian and 100 Chinese cities and a strong affiliate partner network adds another 23 Asian cities to our reach. MSLGROUP in Asia is widely recognized as an industry leader and was awarded PR Agency Network of the Year for two consecutive years in 2012 and 2013 by Campaign Asia, as well as Asia Pacific Consultancy of the Year 2013 by the Holmes Report. The MSLGROUP teams in Asia has also been recognized as leaders by multiple industry groups, including most recently as The Holmes Reports China Agency of the Year (2012), PR Agency of the Year by PRCA in India (2011), Marketing Events Asias Event Agency of the Year, Silver Award (Luminous Experiential, 2012), Forbes Chinas Innovative China SMEs (Genedigi Group, 2012), Taiwan Advertiser Associates Agency of the Year in Taiwan (2011). The teams have won more than 50 awards in the last two years. Learn more at: asia.mslgroup.com