國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
However, it also means that Shanghai as a financial centre – in international comparison – is still only low to medium developed, and at best it can be seen as a regional centre (Loechel, 2010).
State-led global city formation has further implications as well. Chinese example suggests that local goals may overlap with the country’s foreign policy initiatives.
Internationalization of RMB does and will affect the performance of major global cities in China (those with strong financial industry), where the word “liberalization”
means the adaptation of international practises; harmonization and increased transparency of PBoC’s operation. In international environment only under these criterias can financial centres function properly. In conclusion one may say that it’s too early to expect RMB among internationally used currencies (Zhang M. , 2015).
As regards Shanghai, it has an obvious potential, acknowledged by the market, however further progress within its FTZ remains dim (PwC, 2015).
Globalization and economic freedom within Shanghai’s Pilot Free Trade Zone
Shanghai’s Pilot Free Trade Zone (FTZ34 or SPFTZ) was one of the most important contemporary initiaves that indicated the government’s efforts to support the opening up process. Reforms introduced in Shanghai’s FTZ were thus far unprecedented and intended to be milestones for the future transformation of China.35 The goal of the experiment was to derive conclusions from the operation of a ‘small-scale’, ‘open’
market.36 The time limit was three years; results of SPFTZ were evaluated and selected measures were introduced nationwide. This pragmatic approach indicates how tight the actual control is over foreign penetration (or globalization).
“As a pilot zone for exploring policy, the main impacts of the SPFTZ are not the amount of its trade volume or foreign investment, but the institutional innovation it generates.” (Whalley, 2015)
34 FTZ refers to a geographic area where goods may be landed, handled, manufactured or reconfigured and re-exported without the intervention of customs authorities. (Whalley, 2015)
35 “Shanghai FTZ implements reform measures on government function transformation, financial systems, trade services, foreign investment, tax policy and so on, and vigorously promotes the development of Shanghai transit and offshore trade. The process of project approval has once encountered resistance. However, Premier Li Keqiang “Against All Odds” efforts finally made the project through.” (Guan, Fu, & Li, 2014)
36 Negative listing still widely influenced the freedom of the later unified zones.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
The zone itself was launched on September 29, 2013 and as Whalley pointed out, it aimed to address the otherwise problematic areas of foreign [and perhaps joint domestic-foreign] business (co-)operation.
Four special segments were marked – from which the following three deserves a highlight. Probably the most important of all is the financial reform. Within the SPFTZ, the actual realization of capital account convertibility is getting underway, along with extended availability of elsewhere non-present financial services.
Moreover, it entails wide-scale bureaucratic reform in order to reduce the administrational burdens, while the zone’s supervision is being strenghtened (Whalley, 2015). Third main role of Shanghai’s FTZ would be to establish external connections in trade, services or investment and to expand overseas operation.
Structural reforms under the current macroeconomic environment were no longer avoidable. Chinese economy has been shifting towards a more sophisticated pattern, where past decade’s structure (reliance on export and FDI) can no longer be uphold.
Shanghai’s FTZ was created for the cause to test a more market comform environment, both for foreign and local firms.37
Appointing Shanghai as the centre of these ’reforms’ was not coincidental. The city has the highest metro population and a relative openness – being one of the major targets of FDI. Compared to other coastal centers, Shanghai has a long(er) tradition of nurturing special zones, beginning from 1990. It isn’t a unique attribute, however in its complexity, SPFTZ is indeed outstanding (Table 6).
Although the SPFTZ is intending to promote new, barrier-free business environment, it is still built on the legacy of China’s post-Mao developmental pattern, sith certain degree of protectionism remains in force.
“The traditional development model of China has three economic pillars: an investment policy promoting FDI in the assembling industry to absorb labour surpluses, a trade policy encouraging exports to sell excess products and a financial policy aimed at stabilizing an undervalued RMB exchange rate. The SPFTZ is designed to accommodate these policy directions.” (Whalley, 2015)
37 According to the enumeration of Xiao: “SPFTZ is to be pioneer in adapting to international laws, regulations, governmental service and operational modes, and provides applicable and replicable modes of system reform for deepening China’s reform and opening-up.” (Xiao, 2016)
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
One of the key concerns is the practise of negative-listing which involves substantial amount of business restrictions. Some only requires bureaucratic approval by local authorities, while certain activities are initially prohibited to engage in.38
Expectations about fast-paced elimination of barriers and distinction/discrimination between domestic and foreign entrepreneurs were proved to be wrong (full transition is unlikely to happen anyway). What seems more reasonable is that a wide spectre of industries will be operating under ’real market’ conditions, where companies are allowed to draw in ’unlimited’ external financial sources, beyond Hong Kong, Singapore, Macau or Taiwan (a possible achievement on middle-long term).
At the same time the zone is expected back up the RMB internationalization project via providing capital account convertibility, interest rate liberalization and the cross-border use of RMB (Whalley, 2015). As a step ahead, PBoC granted special rights for free trade accounts to freely settle international transactions (using RMB) within the FTZ. Free trade accounts may have broader impacts throughout cross-zone financial movements, which can be useful for investment support outside of the free trade zone.39 These reforms were approved and overseen by the National Development and Reform Commission (NDRC). Their main task was to considerably reduce the lenght of authorization from the initial six months to about a week providing a more business-friendly environment.
“After 7 days, enterprises can get “Overseas Investment Certificate” and settle exchange through bank records directly, so that time cost, money cost and psychological burden are alleviated significantly; cross-border investment and financing facilitation are more convenient.” (Wang J. , 2016)
Although the entry of foreign companies had been easened, they are expected to remain under tight supervision regarding the operation.
38 Following the revision in July 2014, there were 139 regulations left, including 29 banned business activities (Whalley, 2015). With the third revision as of March 2015, only 122 regulations left, however in specific industries their number increased.
39There are several aspects had been pointed out by Wang in his work. According to his explanation, FTZ helps to build a financial environment, that integrates onshore and offshore business together with domestic and foreign currencies into a ’system’ that highly resembles to the normal operation of international financial market.
‧
Beyond the general discussions, some of the negative matters weren’t equally apparent (mainly the practical ones). Following the two years anniversary, Financial Times publicist hit a critical tone in his article, giving readers a brief idea about how far did the (liberalization) project actually get. It is beyond question that 2015 was a turbulent year for business, resulting a bad macroeconomic environment and capital outflow. It is questionable whether it was indeed so influental that it could significantly set back the initial reform dynamism. Nevertheless, in his summary Wildau highlighted that the administration did become more effective and number of prohibited industries dropped to 122. On the contrary interview subjects – whom were affiliated with certain companies operating within the limits of FTZ – found their business opportunities much less preferential (Wildau, 2015).
Statistically speaking, regardless of the several disadvantages, the general reception of SPFTZ was exceptionally good. Compared to the small size of the area (<30km² in 2014), more than ten thousand new companies appeared in the first year – of which foreign enterprises accounted for roughly 20 to 25 percent. The city’s commitment to unify its special zones further contributed to this ‘success’. The reform-supporting agenda contributed to the innovation dispersion via distributing achievements beyond the border of FTZ. (IDE-JETRO, SASS, 2015). Under such conditions Chinese companies were able to gain first hand experience about international competition, where higher level of adaptation is necessary. In fact, those companies attracted by the newly commenced FTZ, their contribution to local economy remains unclear. The most crucial problem of contemporary onshore business operation lies in the extra costs they generate, both direct and indirect ways. Special economic zones or FTZs – in theorem – help to lower these costs by providing a legal environment comparable to international standards and providing better access to the onshore market. In addition, they grant local companies with offshore business opportunities.
Table 6: Free trade zones by size and function Existing Free Trade
Zones in Shanghai Description Area
(km2) Shanghai Waigaoqiao
FTZ
Shanghai’s “traditional” FTZ, an economic area under special administration.The goods can be imported and exported to other countries without any limitations. Free of tariffs, import linkage tax, license examination, and other regular formalities under customs supervision
10
Waigaoqiao Free Trade Logistics Park
China’s first “bonded logistics park”. It is connected to the Waigaoqiao port, which is located 3 kms from the Waigaoqiao
1,03
‧
FTLP. Its name indicates its main function as being the centre of thousands of logistics companies
Yangshan Free Trade Port Area
It includes a deep-water port and an experimental land area to run international shipping business from there
14,16
Pudong Airport Comprehensive Free Trade Zone
Its main function is to do international transition, distribution, procurement, entrepot trade, and export processing
3,59
Lujiazui Financial and Trade Zone
Lujiazui Finance and Trade Zone is the only state-level development zone in China that takes finance, insurance and securities, and trade as its main industries. The zone is divided into several key development areas: central financial district, Zhuyuan business district, administrative and cultural center, Longyang residential area, etc.
It consists of the northern and southern zones. The northern part develops advanced manufacturing industry, producer services, residence and comprehensive supporting services, while the southern one excels in high-tech industry clusters;
featuring electronic information, automobile and spare parts, modern electrical home appliances and biomedicine
27,38*
(or 20,48)
Zhangjiang Hi-Tech Park It cultivates six types of enterprises/projects: high-end industrial core technology; high value added core products;
overall controlling capacity in the industrial chain; (business?) integration solutions; domestic or overseas intellectual rights in the investment structure low carbon and clean industry
25*
(or 37,2)
Sources: China (Shanghai) Pilot Free Trade Zone website, Shanghai.gov, Pudong Business *Total:
109,16 (or 120,72)
Conflicts of interests between the state and Shanghai
From the perspective of a global city (aspirant) – in order to become a leading global city and to maintain this status, Shanghai – independently from the state – has to do whatever it takes to promote innovation and remove as much barriers as it can.
Despite the often coincident goals of the state and Shanghai, the lenght of this transitional period differs; a regional centre with growing importance cannot postpone its ’globalization’ or its adaptation to the new economic structures. On the other hand, the state has to consider national preferences as well, mainly the protection (the rest) of its inner market.
According to the Chinese point of view, the growing number of free trade agreements are externalities that justify the endeavours of Shanghai (and other cities) to emphasize the expansion of their own FTZs. Although it is a simplified arguement, it intends to demonstrate the complexity of local-national and international interactions.
Besides, Shanghai is undoubtedly an international business hub with growing influence. Local elite is interested in achieving a so-called headquarter economy that is expected to help the city to compete on international level and it also increases its internal and external prestige. It is a well-established, economically also beneficial
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
reasoning. Present state of Hong Kong’s economy can be a role-model in this shift.40 Headquarter economies wish to attract R&D centres on site – the knowledge intensive part of production – together with the realms of management and investment (Li, 2012). Although under normal circumstances striving for headquarter economy in ’secondary position’ is seemingly in vain – with Beijing’s undeniable supremacy, however FTZs provide a special environment, wherein extra benefits of business and regulatory freedom can be decisive factors.41 Considering that even Shanghai’s CBD has now become part of the FTZ, the overall territorial expansion had been momentous (see Table 6).
Free trade zones within the territory of Shanghai have helped the city to maintain its leading role in specific industries and most importantly in providing offshore (business, financial) services (Xiao, 2016). Trade (including import-export, onshore-offshore or trade-related services) of Shanghai are all reasonably competitive, not just domestically, but also on international level. In this ’dual’ economic structure,42 R&D activities may choose to concentrate in a more favourable environment (from foreign MNCs’ point of view) wherein Shanghai excels. Anyhow, FTZs usually come with a preferential treatment for those, whom are willing to set up/relocate their operation to centrally recommended locations or business types.
The role of the state should be to mitigate the negative socio-economic impacts of globalization and if possible consent to the adaptation of progressive measures necessary for local economy.
Outlook and Summary
The case of Shanghai proves that finances are strong enough to influence central policies.43 Financial industries and SPFTZ are in close connection with each other;
mutual interests of domestic – and the much less influential international – lobby against CCP’s regulations are having notable impacts on pushing forward
40 Hong Kong is managing and promoting trade in services, moreover the foreign investment is much less regulated compared to the mainland. Besides, Hong Kong’s port is free from many regulations still present in Shanghai. Capital flow and availibility of financial services are still much broader, foreign (currency) transactions are not controlled (Xiao, 2016).
41 China is among the very few countries that can afford to sustain multiple urban clusters with attributes measure up to ’local’ HQ economies. Apart from Beijing and Shanghai cities like Shenzen, Chongqing or Guangzhou all can coexist and achieve their goals to concentrate high-value added segments of production.
42 It only means that a decisive part of Shanghai’s economy have been migrating (or had been included) into its FTZ. (By author)
43 It is an indirect influence that coincides with the local elite’s interest. Apparently, this elite poses no threat to the gradual liberalization.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
countrywide changes, encouraged by the pilot project of Shanghai. Retrospectively, SPFTZ’s rapid expansion and growth in economic weight was rather unexpected, however based on the first-year’s overperformance of SPFTZ, the Japanese-Chinese co-edited IDE-JETRO forecasted the city to eventually serve as a “second Hong Kong”
[in case, if the current level of barriers can be reduced by fifty percent by 2025 (IDE-JETRO, SASS, 2015)]. This optimism was further backed up by the consensus among authors that Shanghai is currently on the frontier of free trade initiatives of China.
On the contrary a recent work by Haacke pointed it out that:
“The FTZ liberalizations are only incremental in the context of broader economic reforms that companies hope to see from China’s leadership. On its own, the overall impact of these specific liberalizations on company operations is likely to be muted”
(Haacke, 2016)
As it appears, the general picture is based on certain level of bias; either in domestic or in international context, Chinese media (and researchers too) may use this case to promote a better overall imagine of Chinese economy abroad.
In trade, Shanghai has begun to accept and follow greater number of international practises in order to maintain its competitiveness. Customs clearance and the shortened time of investment permit issue were two major steps ahead. Unification of special (free) trade zones, was an other major step ahead in boosting trade with the real Chinese market beyond the FTZ. Continuation of these efforts are necessary in order to build international connections and to enhance globalization, a key aspect for the establishment of a headquarter economy. Current optimism is not groundless, but based on the available information, Shanghai should not be overpositioned too early.
As Xiao suggested: “We need to follow new rules of international investment, lead the initiative of nationwide opening-up, and explore new channels of management mechanisms featuring trade convenience and liberalization.” (Xiao, 2016)
A simultaneous upgrade of the system is vital, otherwise an imbalanced expansion of the highlighted sectors will obstruct one another. Meanwhile, conflicts of interest between the global city and its host state are likely to persist. A well-managed FTZ helps to mitigate the effects of sluggish governmental adaptation and provides
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Shanghai enough space to experiment with a more liberal approach (in accordance with business interests). It includes the otherwise sensitive question about the recognition of onshore RMB, which has been among the top preferences of FTZs, however there are still many requirements to meet. Contemporary tools to ensure fiscal stability, regarding the exchange rates of CNH and CNY, is still insufficient, yet it has been growingly decided by the market.44
It is hard to estimate the balance of results, or what possibilities do SPFTZ have within the current framework on the long-run. It is undoubtedly one of the most relevant things happening in Yangtze River Delta region and would require further research.