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September 30, 2013

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Home » Business » Finance Special

Measures have impact, repercussions beyond Shanghai’s doorstep

By Jane Wang | September 30, 2013, Monday | Print Edition

1.  The acceleration of the China (Shanghai) Pilot Free Trade Zone is part of a national strategy.

The name of the pilot area, the China (Shanghai) Pilot Free Trade Zone, clearly delivers the message that the project is not only a major initiative to speed up Shanghai’s transformation and development, but also part of China’s national reform and its “opening-up” strategy. The pilot free trade zone is the first of its kind in the mainland. According to the State Council, experiences gained from the pilot zone are expected to be copied in other parts of the country. From a global perspective, the pilot free trade zone will have an important role in the next Trans-Pacific Partnership (TPP) talks and likely help China join the TPP.

2.  Understanding and trust are critical to the zone’s institutional environment.

Based on some of the successful economic regional cases (including Hong Kong), we find that a clear, understandable institutional environment accepted by the international community is essential to its success. System development and innovation will bring a lot of opportunities to companies in the area, along with some unavoidable risks. How to balance the openness and risk while designing the system is an important issue to consider.

3.  The reform will focus on the financial sector’s opening up and policy reform, far beyond the scope of tax incentives.

To summarize, this round of reform will mainly focus on the opening of the financial sector, the relaxation of investment controls and the innovation of the trade supervision system. Although preferential tax incentives are highly expected, we should say that the economic reforms and impacts will be far beyond the scope of tax incentives.

4.  Overall, financial reform will push the internationalization of the yuan forward. For Chinese enterprises, this reform will enhance their cross-border fund management efficiency and support their “going out” strategy. For multinational companies, the reform will enhance their regional headquarters’ functionality and the benefits they receive.

a) Exploring the possible plans, foreign banks will be encouraged to establish a branch directly within Shanghai in a shorter period of time. They may also receive licenses for corporate or individual yuan business, while the joint ratio requirement may be relaxed.  The onshore and offshore business may also be able to work more closely together.

b) Traditionally, Chinese enterprises, both state-owned and private-owned, would use an overseas business management platform in Hong Kong, Singapore or even in particular European countries as their investment platform for offshore financing and management of funds. If the pilot zone could create conditions comparable to these overseas platforms, it would be regarded as a new destination for Chinese companies to consider to establish their global headquarters.

c) For many multinational companies operating in China and who have regional headquarters based there, a relaxed financial and foreign exchange environment could help their regional funds management and settlement. This would enhance the functionality and scope of influence of their China-based headquarters. Meanwhile, it can also promote China's economic restructuring and create a development model to promote China as a destination for  regional or global headquarters. 

d)  Financial reform in the zone will promote the development of China’s financial markets and its further opening-up to the international financial community. It will also derive innovative financial products.

5.  The relaxation of investment controls may be the challenging part of the reform process.

The simplified registration procedures may make authorities think the investment management system is unregulated. On the other hand, government still would like to further open China’s investment environment in the pilot zone to attract a wider range of foreign investors. According to the general blueprint, the breakthroughs of the investment management system will involve more innovative approaches including “negative list” management mechanisms. The investment management mechanism and the introduction of the negative list will further reduce barriers to entry. 

6.  Innovative trade supervision systems will upgrade China’s role in the field of international trade. 

The zone’s innovative trade regulations will simplify procedures, reduce costs, and facilitate the effective and efficient flows of people and goods. It will create a convenient environment for trade companies, and improve logistical and operational efficiency. 

7.  Once a relaxed institutional environment is created, enterprises should respect the market order and improve the credit system.

In the pilot area, the government will introduce a series of institutional innovation policies, including the opening of capital accounts, full yuan convertibility, and simplified registration procedures. We would say they are facilitating “effective” not “free” flow. Once a favorable policy environment is created, companies need to be self-disciplined, by respecting the rules of market order and improving their credit systems.   

 

Finance Special


 

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