PRICEWATERHOUSECOOPERS recently completed a report, commissioned by the Shanghai Municipal Government, about progress in the Shanghai pilot Free Trade Zone. It included corporate feedback about new policies and advice on measures that would enhance business in the zone. PwC surveyed large and small businesses, foreign chambers of commerce and trade experts for the report. It also compared the zone with counterparts overseas. Shanghai Daily sat down with Elton Huang, Shanghai senior partner with the firm, to discuss some of the report’s findings.

Q: What are the highlights of this report?

A: We found respondents mostly positive about developments in the zone. We made assessments from five aspects: transformation of government functions, opening-up of investment fields, upgrading trade, deepening financial reforms and improving legal support systems. Additionally, we asked for feedback on the regulatory and tax framework and explored what needed to be done in the future. We adopted the World Bank’s assessment framework and PwC’s evaluation system to analyze respondents’ answers. We assessed these aspects in grading that ranged from “weak” to “strong.”

The most positive responses related to introduction of the negative list as a measure to open up investment options. It was a breakthrough in the zone that has been adopted in many areas outside the zone. The move is a signal that China is willing to embrace foreign investment. The latest 2014 version of the list is much shorter, and companies still expect more relaxation to come.

Also, companies are feeling “relatively strong” about changes in government functions. Measures to replace some administrative approvals with simpler registration mark a transformation from a controlling to a service government function.

These are the most important innovations in the Free Trade Zone in the past year. They streamline the government’s role in the market and conform to international practices. Compared with industrial innovation, changes to adjust government functions are relative more outstanding. In this aspect, we put forward some suggestions to improve the interface between companies and government. For example, procedures are now simplified concerning start-ups, and we think it’s necessary to introduce after-event regulations on issues such as deregistration and mergers so that companies experience more convenience throughout their life cycles. More than half of respondents said they are confident that the government will continue to deregulate its role in the market.

Financial reforms also won a “relatively strong” grading. The most prominent financial reform is the establishment of the free trade account system, allowing separate management of capital in the zone. The accounts facilitate cross-border money flows and trade financing. More than 70 percent of respondent companies said they can actually lower borrowing costs by using the account to access yuan offshore. The bilateral cash pool business can enhance the efficiency of asset management.

In terms of trade policies, nearly 60 percent of respondents said the Free Trade Zone is an attractive destination for their Asian-Pacific headquarters. The area would be even more appealing if it could offer more incentives, a better regulatory environment, and simpler administrative procedures.

Meanwhile, the establishment of a legal system for the zone received a “neutral” grading. The zone has a basic law, but some companies are concerned that details are not specific and supporting laws are insufficient.

Q: What about the regulatory framework and tax issues in the zone?

A: The Free Trade Zone has an essential regulation called “opening-up the first border and controlling the second border.” That refers to opening up offshore activities while still restricting domestic activities. Easier customs clearance rules can indeed shorten time and save costs for companies. We think that credit systems need to be unified across customs, quarantine and quality inspection departments. Otherwise, companies will still have to deal with various departments and won’t be able to enjoy the simplified procedures introduced in the zone. The zone can act as a pilot area to trial a new credit system for companies. It can be expanded in China afterward.

In terms of tax, companies feel the system is quite clear and plausible. Tax regulations in the zone are more simplified than actual incentives. Companies said the rules help lift efficiency and improved the services of the tax authority. However, companies still wish for incentives in the zone. We think the authority can continue to simplify tax management and introduce targeted tax incentives for some business operations, such as offshore businesses and headquarters. Authorities may also consider a tax regime to support corporate overseas expansion.

Q: What do companies expect most from the Free Trade Zone?

A: Companies wish that the government would better understand their needs. It is crucial that the government continue to enhance its services for companies beyond simply issuing new regulations. More coordination is expected among various government departments. In terms of opening up investment, foreign companies said they hope rules in the zone will be made more compliant with international practices. The zone will be more appealing to foreign investors if it does things the way they are done in other major economies.

Q: What advice have you given Shanghai policymakers?

A: The major task for policymakers is to settle details for policies now applied in the zone, especially when it comes to cross-department regulations. In the financial sector, we think mixed operations across banking, securities and insurance sectors are a trend for both financial institutions and regulators. We think financial reforms are now being carried out in a cautious way. It may help if a comprehensive regulatory body is set up to avoid overlaps and loopholes in terms of financial regulation.

Concerning the negative list, compliance with international practices is the major issue and restrictions need to be relaxed further. We think the positive impact of the negative list will ripple through many sectors, transforming government’s role. We are looking forward to more details to be specified in the list, and we hope the government will involve more companies in that process.

The challenge is to build a sound legal environment in the zone to support business operations. Breakthroughs need to be made to solve contradictory legal issues inside and outside the FTZ. It should be possible to introduce a comprehensive assessment mechanism for government officials that focus not on GDP.