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China hopes Shanghai FTZ enlivens economy

By Staff Reports on November 26, 2013

It has been likened to Shenzhen, China’s first special economic zone launched in the 1980s, which sent the country on the road to the global economy and turned it into the world’s factory floor. On Sept. 29, China turned a new page with the opening of the Shanghai Free Trade Zone (also known as the China Experimental Free Trade Zone), a new setup meant to transform China’s economy and investment framework.

Altogether, the zone covers less than 29 sq. kilometers (11 sq. miles), encompassing four Customs special control areas: Waigaoqiao Bonded Area, the Waigaoqiao Logistics Park, Yangshan Port and Shanghai Pudong International Airport.

One of the effects of the SFTZ will be a boost in exports, according to PricewaterhouseCoopers (PwC). There are also hopes that it will facilitate and speed up imports, eliminating the need for backup stock that firms now hold to compensate for lengthy delays in import clearance. PwC analysts noted that Customs formalities within the zone are expected to be so simple and convenient as to only require registration of the product description and value on entry without inspection and possibly no declaration process for goods entering or exiting the zone.

In addition, the SFTZ is expected to act as a catalyst for the development of modern shipping services in ship financing, insurance and trading, as well as port logistics, according to the Shanghai International Shipping Center. Logistics and shipping are two areas targeted for liberalization under the SFTZ legislation, which removes the investment thresholds for foreign stakeholders in such enterprises.

Welcome as these elements are in the logistics sector, they alone hardly merit comparison with the momentous decision to set up the Shenzhen special economic zone three decades ago. The authorities in Beijing have been less than crystal clear about the exact objectives, but the project is widely understood to serve as a microcosm to experiment with measures to open up China further, with particular emphasis on reforming the financial and services sectors, which have so far been tightly controlled. Royal Bank of Scotland analysts noted a widespread understanding that the SFTZ “will go beyond the scope of previous zones in terms of opening up and liberalizing international economic and financial transactions.”

The authorities have identified six key sectors that will be opened up for foreign investment in the zone, namely the banking, shipping, commercial, professional, culture and social services sectors.

Beijing has linked the project to a broader reform agenda, leading to expectations that the Shanghai zone will spawn similar setups around China.

“These reforms will likely be rolled out nationwide within three years, fueling the momentum of ongoing reforms,” the Hongkong and Shanghai Banking Corporation’s research department says.

No air carrier has launched new freighter service to Shanghai in response to the momentous event, nor are international logistics firms rushing to the SFTZ to buy out Chinese players and boost their footprint in anticipation of a surge of traffic.

“Agility is today operating in the four bonded zones in Pudong, but have not seen any change to the existing operations or customs processes after the C(S)PFTZ was launched. In this condition, our strategy here will be to wait and see what further details are released by the government before looking to move/expand/exit, etc. It is unclear what the C(S)PFTZ will actually end up enabling and we are waiting to see further developments,” James Gagne, CEO for Greater China at Agility, says.

The only discernible change on the logistics front so far has been a minor modification in regulations in the Waigaoqiao Bonded Zone, according to Diana Ong, implementation manager at DHL Global Forwarding.

“It is still very early days yet, and I think overall it is designed at the services sector,” James Woodrow, director and general manager of cargo at Cathay Pacific, says. “We will just wait and see.”

Some observers reckon that significant progress at the SFTZ would send China on its way to reducing the efficiency gap vis-a-vis gateways such as Hong Kong, where processes like Customs clearance tend to be significantly faster and more straightforward.

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