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November 3, 2014

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Home » Business » Finance Special

‘Sound regulation’ deflects risk, speculators

Source: Shanghai Daily | November 3, 2014, Monday | Print Edition

EVEN before the Shanghai pilot Free Trade Zone pilot project opened last year, Ernst & Young was advising companies about its prospects and communicating with regulators about its policies. Shanghai Daily sat down with Albert Ng, chairman of Ernst & Young China, to discuss his views about the new zone.

Q: What do you think is the most important function of the Shanghai Free Trade Zone?

A: I think the Shanghai government is very forward-looking to have created the zone. It’s a plan for the future. I’ve been in Shanghai for 20 years, and the changes here are unbelievable. The Shanghai government is clever because it doesn’t confine itself to current achievements, but rather looks to the future. Free trade will impact not only Shanghai but also the whole country. New policies introduced in the zone can be applied elsewhere in China. We’ve long talked about reform and opening-up, and at some point that task requires innovation. The concept of the FTZ is similar to Deng Xiaoping’s ideas decades ago when he chose Shenzhen as a special economic zone to pilot reforms. A lot of knowledge can be acquired only by practice.

Q: How do you view new regulations introduced in the zone so far?

A: When people think about a free trade zone, they immediately associate that with customs supervision. It is the most basic function of a free trade zone. The zone has introduced many simplified procedures in terms of customs declaration, clearance and quarantine inspection. That benefits a lot of companies because the new procedures make customs supervision more efficient.

The negative list is another important achievement in the zone. The number of items has been reduced to 139 in the 2014 version. It will continue to evolve. The implication of the list is much more important than the number of items. It is an international practice, allowing foreign investors to conduct any businesses not on the restriction list. I certainly hope the list can be kept as short as possible. As in many other countries, industries like media, healthcare and alcohol are mostly controlled.

Q: What about breakthroughs in the zone?

A: The policies I mentioned just now are progress but not necessarily the kinds of breakthrough people expect most. In my opinion, there are two major breakthroughs. First, there is cross-border business. Previously, import and export activities in a bonded zone involved goods in China. Now, goods can go through the Free Trade Zone from one country to another even if they don’t relate to the domestic market. Ports like Hong Kong and Singapore handle a lot of trans-shipment business. It is important that Shanghai’s free trade zone become more active in that.

Second, all market watchers are anxiously awaiting financial reforms in the zone. It’s so much easier to move capital than real goods. Many companies not located in the Free Trade Zone can benefit from financial reforms there. It is an aspect with the largest impact and requires the most regulation. Currently, there are still restrictions but the direction is right. Opening-up must come with sound regulations, otherwise international speculators will seize on any weak spots to make a profit. Some cross-border yuan transactions are already allowed in the Free Trade Zone, and some of our clients are benefiting. Borrowing costs may be lowered by a third if they finance from offshore because of the gap of interest rate onshore and offshore. Allowing more convenient cross-border money flows will attract more companies to set up regional headquarters in Shanghai. Again, we need a real-time supervision system to monitor money flows, set off alarms in case of abnormalities and respond immediately.

We are assisting Shanghai’s banking association in planning systems to monitor money flows. Currently, only 10 domestic banks are allowed to open free trade accounts for clients. The problem with foreign banks is that the regulator requires them to link their IT systems with those of the regulator, and the systems of foreign banks cannot yet do that. Regulators should consider such IT issues and information security when it comes to reforms.

Q: What do you expect from the zone?

A: The zone needs more financial tools to attract regional headquarters. From an Ernst & Young perspective, we have benefited from the zone because it brings a huge number of new clients and opens up new fields of services. The more headquarters the zone attracts, the more we can take advantage of that. The government could introduce tax incentives for cross-border businesses and headquarters. It could set up some trade platforms to serve the whole of China. There are all kinds of exchange houses in the world, but there are not many in the zone. The recent launch of the international gold exchange is a good start, but there can be more exchange centers for commodities not yet traded in China, such as natural gas. Once such a platform is established in the zone, it can evolve into a very influential platform globally. Of course, new investment options come with risks and speculators. That again requires a sound regulation system.

In addition, many insurers wish to conduct offshore businesses and provide marine insurance that is currently under strict controls.

Q: What suggestions have you heard from companies about the Free Trade Zone?

A: They are two aspects: policies and operations. For example, when the government was revising the negative list earlier this year, it did solicit

Finance Special


 

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