WHEN Michael Feng, senior manager of a semiconductor distributor, was asked to assess his company’s first year of operation in Shanghai’s new free trade zone, he said easier cross-border payment and faster customs clearance helped double profit.

“An improvement in our operational efficiency allows us to respond to our customer with more speed and flexibility,” he said of his company, which is the sales arm of a Japanese electronics conglomerate that sells to domestic and overseas markets.

Feng gave a high rating to the first year performance of the China (Shanghai) Pilot Free Trade Zone. The zone, which was inaugurated a year ago this month, is serving as a testing ground for further national reforms and market deregulation.

Controls over foreign-exchange settlement have been eased for companies registered in the zone, creating less red tape and lifting restrictions on the amounts of settlement.

Simplified customs procedures make the entry and exit of goods easier. In the past year, Shanghai Customs unveiled 23 reforms to cut clearance costs, streamline procedures and diversify customs services in the zone. The measures have shaved clearance times for imports by an average 41.3 percent, and for exports, by 36.8 percent, according to the agency.

In the first eight months of this year, exports from the zone surged 10.1 percent from a year earlier, and imports rose 8.9 percent. The General Administration of Customs, China’s customs regulator, has begun extending some of these reforms to other national ports.

Feng admitted that his company has yet to be covered by all the trade reforms announced by the zone, but he said he is confident that will happen eventually.

Major milestone

The much-vaunted zone has been hailed as a major milestone in China’s economic reforms, on par with the establishment of the first special economic zones in the 1980s and with the country’s entry into the World Trade Organization in 2001.

It was designed as an experiment for groundbreaking deregulation of foreign investment, the financial system and the services sector ahead of nationwide rollout. Although the concept of the zone has been widely praised by those seeking more liberalized trade and business opportunities in China, expectations have been running ahead of implementation.

“It seems much has been done to improve the free flow of goods, but there haven’t yet been similar substantive changes in the free flow of capital,” said Ella Xu, the account manager at a Shanghai-based business consultancy firm.

Indeed, a “more needs to be done” atmosphere prevails as the zone celebrates its first anniversary.

“I think the principal of what they are trying to do is interesting, but there has been a degree of confusion and frustration about when people will see something concrete,” said Michael Every, head of Financial Markets Research Asia-Pacific at Rabobank.

Xu said foreign business interest in the zone remains wary.

“Some of our multinational clients seemed to have lost patience with hollow reform policies that fail to provide details about implementation,” Xu told Shanghai Daily.

One of the most publicized reforms initiated by the zone is the so-called “negative list,” which specifies off-limit areas for foreign investment in the zone. It replaced the prevailing practice of a list specifying who could do business in China. The “negative list” was supposed to be short, thereby broadening allowable activities. But businesses grumbled that the list was still too restrictive, so it was pared back by a quarter earlier this year, benefiting foreign participation in the financial, health care and education sectors.

What may be significant liberalization in the Chinese context isn’t always viewed as significant in the minds of foreign investors. Of the 12,000 firms registered in the zone since its establishment, only 12 percent involve foreign capital.

“More freedom has been given in areas where China has strength, such as manufacturing, but foreign investors are looking for wider opening in fields such as finance and services, where they have an edge,” said Chen Bo, secretary-general of the Free Trade Zone Institute of the Shanghai University of Finance and Economics.

During a visit to the zone earlier this month, Premier Li Keqiang said the current version of the “negative list” is still too restrictive. He urged it be shortened to allow more room for market vitality.

Geographic restraints are also a deterrent to foreign investment. There is ambiguity, for example, about whether a hospital or school in the zone can provide services to residents living outside the zone, which covers only 28.78 square kilometers in a suburb area.

“Unlike trade liberalization, the opening of the services sector cannot be confined to a limited area,” Shi Liangping, head of the Economic Research Institute of the Shanghai Academy of Social Sciences, said in an interview with Insight China magazine. “It’s important to extend reforms to areas beyond the zone as soon as possible.”

Slow progress

But that doesn’t seem likely anytime soon. During a press conference last week, an official with the Ministry of Commerce said local governments cannot adopt a negative list management method without going through necessary legal procedures and obtaining the approval of the central government.

Once high expectations about swift financial deregulation are also fading. The zone has shown slow progress in delivering promised reforms such as the free flow of capital, liberalized yuan convertibility and market-driven interest rates.

“Financial reform is seen as the zone’s most important mission, but so far no impressive result has been achieved,” Fu Weigang, a researcher at the Shanghai Institute of Finance and Law, wrote in a commentary published in The Beijing News.

In February, China’s central bank fully liberalized interest rates on foreign-currency deposits in the zone, but no timetable has been issued for similar action on yuan deposits.

A separate accounting system has been created in the zone to allow freer flow of capital, such as cross-border financing. Operating details have yet to be announced.

Still, the government is moving in the right direction, said Sun Lijian, deputy director of the School of Economics at Fudan University.

“When talking about financial opening, people first think of capital-account opening,” he told Shanghai Daily. “China has adopted a strategy of promoting the internationalization of the yuan before easing controls on the capital account, and a lot has been done on that front.”

The launch of the international gold trading board in the zone this month, introducing yuan-denominated contracts, was lauded as another milestone toward making the yuan an international currency. Equally, an imminent pilot program creating a link between Shanghai and Hong Kong stock markets is viewed another major step.

The Renminbi Qualified Foreign Institutional Investor program, a quota system first introduced in Hong Kong to allow overseas investors into China’s capital markets with offshore yuan, has been extended to include the UK, Singapore, France, Korea and Germany.

Sun said a more competitive yuan will help regulators manage risks, such as wild speculative movements, in the opening of the capital account.

“When China becomes strong enough in risk management, and Europe and the US end their quantitative easing policies, it will be time for the government to lift restrictions on the capital account,” Sun said. “During this process, it’s important for Chinese financial institutions and enterprises to innovate their business models and enhance profitability, rather than wait and rely on policy spoon-feeding.”